The pound was under pressure against the US dollar, as we headed into the beginning of last week, and a combination of factors kept it that way. However, having tested €1.21 against the euro, there was some hope that the pound could hold strong against this particular currency. That hope proved misplaced.  

Overwhelmingly, the pound’s weakness was driven by survey and data evidence at the end of the week. Friday saw the April Growth from Knowledge consumer confidence survey report the weakest level since the height of the global financial crisis back in 2008, and a significant component of that survey, what consumers thought of the outlook for their personal finances, fell to its lowest reading on record. Following swiftly after that, March retail sales volumes recorded a slump, dropping by 1.4% on the headline measure and 1.1% on the measure excluding autos and fuel. That drop in retail spending was even before the damage has been done to household disposable income from the rise in energy bills, following the increase in the price cap. There was also a drop in the preliminary April reading of the services Purchasing Managers’ Index (PMI), again hinting that discretionary spending is already being reduced.   

Somewhat surprisingly, Bank of England Monetary Policy Committee member Catherine Mann made remarks suggesting that she was mulling over the idea of a 50-basis point rate hike at the May meeting. The remarks were made prior to the batch of consumer indicators, which may well have changed her mind. There was another big increase in gilt yields over the course of the week, with market implied probabilities now expecting UK official rates to be above 2.5% by the end of Q1 2023. That still looks too much to me, and a threat to the GBP in the weeks to come.  

For this week, having reached a 16-month low in GBPUSD ($1.2829) and tested €1.19 in GBPEUR last Friday, and fresh lows at $1.2729 and €1.1851 this morning (Monday 25 April), I suspect there are additional downside risks. The survey data that is due for release is expected to record additional weakness in business confidence, industrial orders and retail sales. Perhaps the only positive is likely to come from the UK housing market, where there is risk to the upside, in terms of house prices, due to lack of supply. Is the UK macro-outlook about to get a whole lot worse? Furthermore, reports in the Times newspaper suggests that the Sue Gray investigation into Downing Street parties might be very damning of the PM’s involvement, heaping further pressure on Boris Johnson and the GBP, in my view.

The last week presented some surprises in terms of the Euroland economic data and surveys. March producer price figures from Portugal and Germany pointed to much larger inflation pressures than seen in February or versus expectations. In terms of activity, numbers last week got off to a poor start, with new car registrations down sharply, -20.5% year-on-year in March, swiftly followed by weaker consumer confidence readings for April from Ireland and the Netherlands. However, French business confidence was not as bad as had been predicted in April, only falling marginally. While Euroland consumer confidence surprised everyone with an increase in April versus March’s outturn. At the end of the week, a stronger outturn from the preliminary April Euroland services PMI offered another shock.  

However, the euro benefited most from ECB officials Lagarde and Holzmann, whose comments deviated from those made at the press conference last week, following the ECB Governing Council meeting. There was more talk about concerns over currency weakness, normalising policy and risks, that by not hiking relatively soon the ECB risked having to hike by more overall, rather than what appeared to be concerns over downside growth risks at the press conference. The euro rallied, but failed to hold onto those gains, with the market seeing greater benefit from the US dollar. The EUR made gains against the GBP, but that was due more to the weakness of the UK economy, in my opinion.  

Over the weekend, Emmanuel Macron won a comfortable victory in the Presidential Election, to return as French President for a second term. However, suggestions are that his tenure may be made more difficult this time around, with voters in the upcoming national elections likely to be more split. There was a lower turnout for the second round versus 2017 and Macron received around 2 million fewer votes, whilst Le Pen secured around 2.6 million more. How far will Macron be prepared to pivot to appease disaffected voters? It is clear the cost-of-living crisis was a significant factor in this election, and could resurface in parliamentary elections.  

This week has already seen the German Information and Forschung business climate index for April released. It was expected to record a modest worsening in the current assessment and expectations, albeit the pace of decline was forecast to slow. The outturn was that both rose unexpectedly and that marginally helped the EUR, but not by much. In the remainder of the week, preliminary Q1 Gross Domestic Product (GDP) releases and the provisional April consumer price inflation estimate are due. The risks are that GDP is slightly better than expected and April Consumer Price Index inflation continues to rise. If that is the case, then this could provide the EUR with further cause for appreciation, but again more so versus the GBP than the USD.

Markets appear nervous about what the central banks will do on monetary policy. I remain of the opinion that the forecasts for ECB monetary tightening whilst over-zealous are still less alarming than the forecasts for Bank of England or Federal Reserve rate increases. That could yet come to the EUR’s aid in the weeks to come, in my opinion, but perhaps not in the run in to the Federal Open Market Committee (FOMC) meeting on Wednesday 4 May.

The Federal Reserve again continued to argue vociferously for an aggressive approach to monetary tightening over the coming meetings. Fed Chair Jay Powell seemed to give the nod to successive 50 basis point hikes in the targeted Fed Funds rate, over the course of the May, June and July meetings, to tackle the overshoot on inflation. The St Louis Fed President, James Bullard, wanted to go further, hiking by 75 basis points in order to make the strongest start to the tightening cycle possible. That certainly helped to increase rate hike expectations further, with financial markets now assuming US interest rates will top 3% by the time the first meeting of 2023 concludes. It still looks way too aggressive in my eyes, especially given further weakening in some key secondary data releases.    

In particular, the US weekly mortgage applications data continued to report a drop in new mortgage applications. This combined with a weakening in March existing home sales, a slide in the April Philly Fed’s business outlook index, and a drop in the preliminary April services PMI activity index, did little to undermine interest rate hike expectations, even temporarily. Risk appetite dropped towards the end of the week, but had little impact as far as near-term US rate hike expectations are concerned.   

The US dollar gained broadly, up against most majors and the USD index rose to 101.331, its highest level since 25 March 2020, and 3% higher than where it began April. Could there be further gains to come? I think there may well be, although it could well depend on the performance of the economic indicators from the US over the course of this week, and ahead of the FOMC meeting on 4 May. This week there will be a lot of interest in the Conference Board and University of Michigan’s releases of consumer confidence and sentiment figures for April. These could pull off a further surprise increase. Also, another  potential upside surprise is the initial estimate of Q1 GDP from the US. If we do get some better (albeit generally backward-looking) news about growth and less weak consumer confidence indicators, that might prove enough to maintain the upward momentum for the dollar, in my view. We are not there yet in terms of the highs that the US dollar can reach, in my opinion.

The last week was a relatively quiet one in terms of central bank meetings. Bank Indonesia left the key 7-day reverse repo rate at 3.5%, and the People’s Bank of China left both of its key interest rates on hold, when for the latter a small loosening had been expected by the financial markets. The concerns over inflation appear to currently outweigh any concerns over the downside risks to growth, and the latest batch of Chinese economic data were marginally better than expected. 

For this week, there are a lot of central bank decisions due, but all may not go to plan. The consensus is for the central bank of Kazakhstan (Monday) to hike interest rates 150 basis points to leave official rates at 15%. But could the central bank decide against such an aggressive move, given the Russian central bank decision later in the week? The central bank of Hungary (Tuesday) is expected to hike interest rates 1 percentage point to 5.4%, but have perhaps signalled that the pace of tightening is slowing, which may be helped by the stabilisation of the forint against the EUR. The Swedish Riksbank (Thursday) is expected to leave policy on hold for now, but risks of a tightening have increased after an unexpected surge in March inflation rates. The Bank of Japan (Thursday) is widely anticipated to leave policy on hold, with growth risks continuing to outweigh inflation issues and a weakening Japanese yen. Friday sees the Russian and Colombian central banks decide. A cut of 200 basis points is forecast as far as the Russian central bank is concerned, although the suggestion that inflation is a receding problem for Russia is yet to be proven. As for the Colombian central bank, a hike of between 50-100 basis points should be priced in, and there is a receding risk of a larger hike, in my view, after a weaker batch of activity data releases.