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Leaning toward a hike


Tumbling down

Sterling weakened against most other G10 currencies in last week's trading as worries over UK growth and speculation around a slowdown in the Bank of England's monetary tightening approach circulated. From Friday's trading open to this morning, the Pound to US Dollar exchange rate had fallen by 2.1%. The US Dollar has been strengthening due to risk aversion, but UK data on Friday also disappointed. The S&P Global/CIPS UK Services Purchasing Managers' Index fell from 62.6 in March to 58.3 in April, remaining in expansionary territory but lower than the 60.0 forecast. Meanwhile, UK Consumer Confidence slipped to -38 in April, following March's -31 reading and -33 forecast. However, perhaps the most disappointing development on Friday came when UK Retail Sales stats tumbled below expectations. On the year, Retail Sales had reached a positively revised 7.2% in February. March's reading released on Friday sank below the 2.8% prediction to hit a meagre 0.9%. The Retail Sales reading excluding fuel dove from 4.7% on the year in February to a lacklustre -0.6% in March.
The figures highlight worry from consumers and show signs of a growth slowdown amid the soaring cost of living that continues to squeeze households. Interestingly, the data here reflects a period before the cap on household energy costs increased by 54% and national insurance increased by 1.25%, meaning the April figures could be interesting ones to watch. BoE Governor Andrew Bailey has warned that the central bank is caught in a balancing act of how best to manage rampant inflation without stunting economic growth, and the risks of tightening monetary policy too much. However, senior policymaker Catherine Mann has shown hesitation in backing the idea of pausing interest rate hikes.
There's little taking place in the week ahead; UK Public Sector Net Borrowing Stats will be released, and Bank of England Governor Andrew Bailey will also speak. Any comments from Bailey on the topic of monetary policy could be influential for Sterling.


Potential problems for energy imports

Last week, the Pound closed 1.57% lower versus the Euro after four consecutive weeks of gains. However, the Euro has been trading higher versus the Australian Dollar today after a commodity market sell-off as global growth concerns weigh. Additionally, the European Union could look to ban Russian energy imports, which could cause problems, particularly in the Eurozone's powerhouse, Germany.
In politics, French President Emmanuel Macron secured a second term garnering 58.55% of the vote, but there was the lowest turnout—only 72%—since 1969. There's a wealth of influential Eurozone events taking place this week. The European Central Bank will release its 2021 Annual Report, which details the Eurosystem's monetary policy, tasks, and activities. Additionally, European Central Bank President Christine Lagarde will be speaking this week. Similarly to other central bankers, any comments regarding monetary policy could create some currency movement.
There are quite a few data points due out in the week ahead also, including Eurozone Consumer Confidence (forecast to tumble further into contraction), Industrial Sentiment, Economic Sentiment, and highly influential Growth Rate and Inflation Rate numbers. Any deviation away from predictions could also cause a reaction in the market at a time when both inflation and growth are being closely watched amid central banks making monetary policy decisions.


Standing strong

The Buck has continued its strengthening trend, with the US Dollar Index trading at a two-year high ahead of the next Federal Reserve meeting on May 4th. Markets anticipate a 50 basis-point interest rate hike when policymakers meet in May while pricing in the potential for even larger rises in the June and July meetings. The Pound closed 1.6% lower against the US Dollar last week after reaching its lowest level since October 2020.
The Dollar's been noting gains in recent weeks, being seen as a safe-haven currency when markets enter risk-off mode. Given the conflict in Ukraine, the divergence of central banks, and potential lockdowns in China as Covid cases surge, it's possible the US Dollar could remain strong in the foreseeable future, with further gains achievable.
Data to watch for in the week ahead includes US Durable Goods Orders, Consumer Confidence, Gross Domestic Product Growth Rate, Michigan Consumer Sentiment, and the Personal Consumption Expenditures Price Index. All are highly influential, but the growth and inflation figures will probably be watched the most closely. The Federal Reserve appears to be on an aggressive path of monetary tightening to tackle inflation—potentially at the expense of economic growth—so readings will be viewed acutely in the coming months.


Leaning toward a hike

The Pound to Australian Dollar exchange rate closed last week 0.45% higher after falling as much as 0.90% earlier in the week. Meanwhile, the Pound to New Zealand Dollar exchange rate closed 0.66% higher, marking three consecutive weeks of gains. Last week, New Zealand inflation data showed a rise from 5.9% to 6.9% in the first quarter on the year. However, expectations were for a climb to 7.1% annually. The New Zealand services sector also showed an upswing in March. Meanwhile, the Reserve Bank of Australia released its meeting minutes last week, showing that policymakers were leaning toward an interest rate hike—upcoming inflation and wage data will be in close focus while policymakers weigh their options.
Australian data this week will consist of Inflation Rate numbers (expected to increase from 3.5% to 4.6% in Q1 on the year). Meanwhile, New Zealand stats will consist of Balance of Trade and Business Confidence numbers.


Declining against the Dollar

Against the Canadian Dollar, the Pound closed 0.78% lower last week, reaching its lowest level since November 2019. However, while the Pound may have softened versus the Loonie, the Canadian currency has been struggling against the US Dollar. The Canadian Dollar posted its most significant open-to-close decline since July 2021 on Friday after oil prices fell, and investors considered the different approaches to monetary policy the Bank of Canada and US Federal Reserve may take.
It's not a busy week for data ahead, but there are still a few events which could impact CAD trading. For instance, Average Weekly Earnings stats and the February GDP growth reading will make their way onto the market. Bank of Canada Deputy Governor Timothy Lane will also speak.