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Tough times ahead

View from the Trading Desk:

With US Dollar dominance tearing through markets, negative momentum for the Pound looks set to continue into this week and perhaps beyond as risks to the UK’s economy mount. Despite having lost as much as 10.5% against the Greenback since the start of the year, Sterling looks vulnerable to further downside moves following last week’s dovish Bank of England rate hike. The BoE was candid about its outlook for the UK, warning that inflation—expected to top 10%—will likely cause economic stagnation. News headlines continue to focus on the cost-of-living crisis, with most Brits having to scale back consumption to account for rising prices and higher rates.

What better timing then, for Brexit to rear its ugly head once more. Over the weekend, deputy PM Dominic Raab said that the government will move quickly to fix the Northern Ireland Protocol after Sinn Fein’s election victory last week. Stability in the region has been threatened with the second-place Democratic Unionist Party refusing to return to government if the Protocol remains in place. Of course, victory for the nationalist party—the former political wing of the IRA—also raises the prospect of a push towards reunification of the north and south of Ireland. Reports that the UK will unilaterally rip up the post-Brexit trade agreement, plunging the two sides back into the mire, provide additional fuel for both Sterling and Euro bears.

Bottom line: We hesitate to add anything to counter all the Sterling negative chatter, but the pragmatism from the BoE was at least refreshing. Acknowledging the recessionary forces weighing on the economy is the first step to markets rebalancing hawkish expectations of rates up above 2% in the near term.


The week ahead


Sterling selling pressure continued last week as recession warnings by the Bank of England rattled markets, with the central bank attempting to restore price stability and avoid stagflation. Markets have rolled back their interest rate expectations as the window for greater hikes appears to be narrowing, with a growth slowdown looking more likely. An interest rate peak of 2.5% in 2023 is now predicted versus the 2.6% expectation before Thursday’s meeting. House prices in the UK continue to hit record highs, but as incomes are squeezed over the course of this year, the pace of home buying is anticipated to fall despite mortgage approvals remaining above pre-pandemic levels, according to Halifax. Elsewhere, the UK government is threatening to abandon the Northern Ireland Protocol if EU border checks are not scaled back.

  • Monetary Policy Committee (MPC) member Michael Saunders speaks at the Resolution Foundation today.
  • The British Retail Consortium (BRC) will post its latest figures for the Retail Sales Monitor y/y this week. Analysts are expecting a 3.5% reading in April.  
  • Preliminary Gross Domestic Product q/q data for Q1 2022 is expected at around 1.0% compared with 1.3% growth in Q4 2021.
  • No change is expected in UK Industrial Production m/m in March following a 0.6% contraction in February.



The Euro has had a moderate lift at the start of today’s trading session following hawkish comments from European Central Bank members Francois Villeroy de Galhau and Joachim Nagel on Friday. Villeroy has emphasised the need to raise the ECB’s deposit rate back to positive territory this year, while Nagel is supportive of raising rates as soon as June if bond purchases are to end as expected. This would be a welcome lift for the common currency, which is trading at a five-year low against the US Dollar as the Greenback continues to find strength amid growth outlooks across the world dampening investor sentiment. European stocks slipped this morning as bearish themes continue to influence capital flows. 

  • Eurozone and Germany ZEW Economic Sentiment figures will be published on Tuesday, with analysts expecting -42 and -43 readings, respectively.
  • German Bundesbank President Joachim Nagel will speak at the National Association for Business Economics on Tuesday, detailing the impacts of the Russian invasion of Ukraine on inflation and monetary policy.
  • European Central Bank President Christine Lagarde will speak on Wednesday at 9:00AM.
  • Eurozone Industrial Production m/m is forecast to fall 2.1% in March, versus a 0.7% gain in February.



The US Dollar buying continues heading into the week; with the DXY gaining another 20 basis points this morning, the index is up almost 8% year-to-date. The Federal Reserve announced its largest interest rate increase for 22 years last week, implementing a 0.50% hike. Like many others around the world, the central bank faces the difficult task of managing price stability and recession risks. However, consumer prices are expected to rise in April, but at a slower pace for the first time since August 2021 according to analysts at Bloomberg. This would be a welcome respite for the central bank, which is attempting to weigh geopolitical uncertainties with delicate economic challenges domestically. US stock market futures are pointing lower yet again; the S&P 500 implied open was just under 2% lower this morning as risk assets continued their sell-off.        

  • Federal Open Market Committee (FOMC) members Christopher Waller and Loretta Mester will be speaking during the course of this week.
  • US Consumer Price Index and Core CPI m/m are forecast to come in at 0.2% and 0.4% for the month of April and are due this Wednesday at 1:30PM.
  • Producer Price Index and Core PPI m/m for April will be released on Thursday, with analysts expecting 0.5% and 0.6%, respectively.
  • Preliminary University of Michigan (UoM) Consumer Sentiment is projected to fall to 64.1, down marginally from the 65.2 print in April.


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