NI Protocol poised for a change ahead of crisis talks

GBP

The pound was up against the US dollar on Friday after a week of selling which had pushed the currency to two-year lows against the USD.

Sterling was up 0.21% a day after falling despite disappointed data points to a weakening British economy. UK data for last week was poor due to several factors: unsatisfactory GDP data from March, a stagflationary backdrop for the country, as well as tensions boiling over the Northern Ireland Protocol.

Regarding the NI Protocol, senior British politicians want to overhaul the agreement on trade between Northern Ireland and the UK. They have warned they may have to take a unilateral action which in turn could spark a trade war with the EU just when the UK least needs it. Data last Thursday showed Britain’s economy unexpectedly shrank 0.1% in March after a slump in car sales due to supply chain problems. That has exacerbated concerns about a weakening growth outlook that could slow the Bank of England’s rate-hiking cycle, and battered the pound. This culminated with the pound heading for a fourth straight week of falls.

There will be a host of UK data to drive the pound this week with the focus being UK inflation data out on Wednesday, which is expected to rise 9.1% year on year in April up from 7% in March.

EUR

However Sterling enjoyed some recovery against the euro at the end of last week, but this is more to do with euro weakness than pound strength. The euro came under pressure amid ongoing security concerns. Finland and Sweden, who historically have been seen as neutral countries, have now requested NATO membership.

Brussels is still trying to approve a plan to ban Russian oil imports across the bloc but so far Hungary is holding up the vote.

USD

The dollar slipped on Friday as a rally in equities contributed to a risk-on mood, but was still set for a sixth straight week of gains. Investors still remain concerned about a slowing global growth and Federal Reserve policy tilting the United States into a recession. High inflation and the Fed’s rate hike path have fueled worries of a policy error that could cause recession or a stagflation scenario of slowing growth and high prices.

Readings this week show some signs that inflation is beginning to ebb, although at a slow pace. The dollar showed little reaction on Friday to data showing US import prices were unexpectedly flat in April as a decline in petrol costs offset gains in food and other products, a further sign that inflation has probably peaked.

Key announcements

10:00 – EUR – Economic forecasts
13:15 – GBP – UK monetary policy reports hearings