Markets see an uplift in Sterling sentiment

GBP

Sterling recovered from recent lows against the dollar on Monday to trade at its strongest level for two weeks against the US currency. The appreciation in the British currency follows an uplift in Sterling sentiment which stems from a positive end to the previous week. Last week saw UK Retail Sales surpass market expectations, and hawkish comments from Bank of England Chief Economist Huw Pill confirmed that the BoE’s monetary policy tightening has some way to go.

The uplift has offered the pound some much needed respite. Sterling has depreciated in recent weeks in the wake of a dovish interest rates hike at the last MPC meeting, which also delivered downgraded economic growth forecasts – increasing fears that a recession could be on the cards.

The BoE has drawn criticism in recent weeks with former Governor Lord King stating the Covid response from the central bank helped push up inflation. Speaking in Vienna yesterday, current BoE Governor Bailey refuted these claims citing the tight labour market and increasing cost of energy. Bailey also refused to rule out further rate hikes stating that “in order to bring inflation to target the bank is prepared to increase rates further”.

EUR

The euro rallied against its peers yesterday following comments from ECB President Lagarde that the Eurozone is on track to end negative interest rates within the next few months with the end of September cited as a likely date. The interest rate currently sits at -0.5% in the EU and has been in negative territory since 2014. Markets have now started pricing in a 0.25% increase in EU interest rates by July with a further 0.25% hike being priced in for September. Lagarde went a step further stating that increasing interest rates past neutral was an option if the Eurozone economy was overheating. However she added a caveat reminding markets that, with further supply side constraints expected to negatively impact the EU economy, a gradual and flexible approach to adjusting monetary policy may be necessary.

Key announcements

08:30 – EUR – S&P Global/BME Composite PMI (May) GER expected 54 down from 54.3 previous
09:00 – EUR – S&P Global Composite (May) expected to fall to 55.3 from 55.8 previous
09:30 – GBP – S&P Global/CIPS Services PMI (May) expected to fall to 57.3 from 58.9 previous
17:20 – USD – Fed Chair Powell speech
19:00 – EUR – ECB President Lagarde speech