British Pound was steady against dollar and BOE policy in focus

Reuters: The British Pound was steady against the dollar on Monday, trading in close proximity to a 10-month high hit earlier this month as markets expect the Bank of England to continue tightening policy to bring down inflation.

British Pound was steady

Data last week showed British consumer prices at 10.1% in March, the only country in Western Europe with double-digit inflation. This bolstered bets that the BoE would need to hike interest rates by more than previously expected, with a raft of banks revising upward their expectations for further monetary tightening. “Inflation hasn’t come down sufficiently, the labour market continues to be tight and wage growth is still accelerating so we think the BoE will be inclined to go with another 25 basis point hike in May,” said Danske Bank FX analyst Kirstine Kundby-Nielsen.

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In an interview published late on Friday, BoE deputy governor Dave Ramsden said the central bank needed to focus on tightening monetary policy sufficiently to control inflation. Economists polled by Reuters expect the BoE to raise rates by a further quarter point on May 11 to 4.5%, in what would be its 12th consecutive rate rise since starting to increase interest rates in December 2021. Traders meanwhile fully price in a 25 basis point hike at the May meeting. At 1040 GMT, the pound was flat against the dollar at $1.2448. It hit its highest level since June last year at $1.2545 on April 14. Sterling has been one of the best performing major currencies in 2023, having risen more than 20% against the dollar since hitting an all-time low in September last year.

Ratings agency S&P Global revised up its outlook for Britain’s sovereign credit rating on Friday, removing the “negative” label which it applied after September’s “mini-budget” under then-Prime Minister Liz Truss. The rating was retained at AA. The euro was up 0.1% against the pound to 88.43 pence. “Our profile is for euro-sterling to remain around the 88 level,” Danske Bank’s Kundby-Nielsen said. “But we could see some sterling weakness against the euro next week if the ECB hikes by 50 basis points,” she added. Markets currently expect the ECB to raise rates by 25 basis points next week, with around a one-in-three chance of a larger 50 basis point hike.

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US Dollar

Reuters: The dollar fell to a more than one-week low against major currencies on Monday in generally thin trading, as investors continued to price in interest rate cuts this year by the Federal Reserve after a widely expected rate increase at next week’s policy meeting. The Japanese currency, on the other hand, also struggled amid remarks from new Bank of Japan governor Kazuo Ueda about the need to maintain monetary easing ahead of a closely watched Bank of Japan meeting on Friday. Aside from the Fed, the European Central Bank also meets next week and is also expected to lift rates by 25 basis points-, with the possibility of a 50-bps hike as well. Euro zone inflation and growth data are also due later this week. In afternoon trading, the dollar index fell 0.3% to 101.34 after earlier dropping to a 10-day low. “The dollar is struggling to build on last week’s gain as coming data could show slower U.S. growth and lower inflation, outcomes that would cement the case for a mid-year rate pause,” said Joe Manimbo, senior market analyst at Convera in Washington.

Fed policymakers are widely expected to raise rates by another 25 bps at next week’s meeting, but they are seen pausing in June. The rate futures market has also factored in roughly 50 bps of rate cuts by the end of the year. The euro was up 0.5% against the dollar at $1.1045, hitting a 10-day high of $1.1050. It was back above $1.10 for the first time since it hit a 14-month high of $1.10755 earlier this month. Against the yen, the euro hit its highest since December 2014. It was last up 0.6% at 148.33 yen . The dollar also rose versus the Japanese currency, and was last up 0.1% at 134.275 yen. “The dollar is trading well within well-worn ranges,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “It’s the calm before the storm. Next week we have the ECB and the Fed meetings, as well as the U.S. jobs data. I would be surprised if people take big bets this far away from those events.”

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German business morale rose slightly in April, a survey showed on Monday, as Europe’s largest economy hopes to have dodged a winter recession. There were likewise hawkish remarks from Belgian central bank chief and ECB policy maker Pierre Wunsch. Beyond the excitement of the euro/yen cross, currency markets were quiet, as traders waited for key central bank meetings, the first of which is the BOJ on Friday, the first Ueda will chair. Ueda is widely expected to maintain the BOJ’s current ultra-easy yield curve control policy, having reassured markets since succeeding Haruhiko Kuroda early this month that any change in policy won’t happen quickly. Both the Fed and the ECB will meet next week. But before that, market participants will pore over U.S. first quarter GDP and personal consumption expenditures data, looking for signs of economic strain and evidence of sticky inflation for clues on the Fed’s policy path.

The Swedish central bank also meets this week, on Wednesday, though Barclays said a priced-in 50 basis points hike from the Riksbank was unlikely to help the crown much beyond limiting its downside. The dollar last traded at 10.249 crowns, up 0.1%. Elsewhere, the Swiss franc firmed, pushing the dollar 0.5% lower to 0.8879 francs.

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South African Rand

Reuters: The South African rand slipped on Monday as markets awaited economic data out of the U.S. later this week, which could influence the Federal Reserve’s rate-hiking cycle. At 1512 GMT, the rand traded at 18.1550 to the dollar, down 0.28% from its Friday close. The U.S. currency was last down 0.18% against a basket of rivals. The lack of risk appetite for the rand is a response “to high impact data this week that will set the tone for next week’s Fed rate decision – an announcement that will likely shape the South African Reserve Bank’s reaction”, DailyFX analyst Warren Venketas told Reuters. Investors will be looking at the U.S. GDP quarterly growth rate and core Personal Consumption Expenditures index data due later this week for clues on the Fed’s future path.

South Africa marks Freedom Day on Thursday, and with the following Monday another public holiday – Workers’ Day – many local traders will be away from their desks from Wednesday’s market close until next Tuesday. The risk-sensitive rand often takes its cue from global factors like the outlook for U.S. monetary policy in the absence of major local drivers. On global markets, the focus will be on a slew of central bank policy meetings that could signal how soon the steep increases in interest rates globally might come to an end. “The South African economy will find it difficult to cope with a sustained aggressive hiking cycle from the U.S.,” Venketas added. “The next few weeks will be crucial for not just the local currency but the South African economy as a whole.”

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Shares on the Johannesburg Stock Exchange gained slightly, with both the broader all-share index and the blue-chip Top-40 index ending over 0.2% higher. The government’s benchmark 2030 bond was weaker, with the yield up 6 basis points at 10.180%.

Global Markets

Reuters: Wall Street shuffled to a mixed close on Monday, with interest rate-sensitive momentum shares weighing on the Nasdaq and U.S. Treasury yields dipping as investors braced for a week of high-profile quarterly earnings and closely watched economic data. The benchmark S&P 500 and the Dow ended the session modestly higher while Microsoft Corp, Tesla Inc and other megacaps pulled the Nasdaq into the red. “People are unsure about what this week holds, especially when it comes to earnings,” said Robert Pavlik, senior portfolio manager at Dakota Wealth in Fairfield, Connecticut. “There’s a lot to be cautious about and today reflects that. There’s not a lot happening.” Earnings this week include a spate of potential market movers, including tech and tech-adjacent Alphabet Inc, Microsoft, Meta Platforms Inc and Amazon.com Inc. High-profile industrials General Motor Co, Boeing Co, Northrop Grumman and Caterpillar Inc are also on deck.

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On the economics front, a spate of housing data, industrial output and the Commerce Department’s first stab at first-quarter GDP will be capped on Friday by the closely watched and wide-ranging Personal Consumption Expenditures report, which tracks income, spending and inflation. “Everyone’s looking forward to PCE on Friday, given that’s the Fed’s preferred measure of inflation,” said Tim Ghriskey, senior portfolio strategist Ingalls & Snyder in New York. The Dow Jones Industrial Average rose 66.44 points, or 0.2%, to 33,875.4, the S&P 500 gained 3.52 points, or 0.09%, to 4,137.04 and the Nasdaq Composite dropped 35.25 points, or 0.29%, to 12,037.20.

European stocks closed essentially unchanged ahead of potentially market-moving earnings reports, which include a stream of European banks aside from U.S. megacaps. The pan-European STOXX 600 index lost 0.01% and MSCI’s gauge of stocks across the globe gained 0.11%. Emerging market stocks lost 0.35%. MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.35% lower, while Japan’s Nikkei rose 0.10%. U.S. Treasury yields fell as market participants appeared to grow increasingly jittery about the approaching debt ceiling deadline. Benchmark 10-year notes last rose 18/32 in price to yield 3.5034%, from 3.572% late on Friday. The 30-year bond last rose 34/32 in price to yield 3.718%, from 3.778% late on Friday.

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The greenback and the yen weakened in advance of the United States and Japan’s respective central bank policy meetings. Financial markets have priced in a 91.4% likelihood that the Federal Reserve’s meeting next week will culminate in another 25 basis-point interest rate hike. The dollar index fell 0.45%, with the euro up 0.51% at $1.1043. The Japanese yen weakened 0.08% versus the greenback at 134.28 per dollar, while sterling was last trading at $1.2483, up 0.43% on the day. Crude prices seesawed but turned higher later in the session on optimism over strengthening Chinese demand. U.S. crude rose 1.14% to settle at $78.76 per barrel and Brent settled at $82.73, up 1.31% on the day. Gold edged higher ahead of major economic data that would affect the Federal Reserve’s decision making at next month’s monetary policy meeting. Spot gold added 0.3% to $1,989.14 an ounce.

Published by the Mercury Team on 25 April 2023

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