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The pound zoomed ahead last week but its strength could be under threat.
The pound entered a new week counting sizeable advances over the euro and the US dollar. By the time of market close on Friday, GBP/EUR was closing in on its highest in over two years, while GBP/USD had long passed that milestone.
Last week saw the Federal Reserve throw caution to the wind and decide on a bumper 0.5% cut to interest rates. The Bank of England were far more reserved and opted for another hold, and that disparity in approach explains much of sterling’s recent momentum.
As the dust settled, markets took stock of the pound’s weekly advances, which totalled over 1% against the US dollar and three quarters of a per cent against the euro. However, the Bank’s decision was more the case of delaying the inevitable than quelling growth. Economic pains and an increasingly gloomy consumer outlook mean the pound could be in for a swift fall from grace not too long from now.
UK public sector debt is a cause for concern, hitting 100% of GDP last month. The news will be a bitter blow for chancellor Rachel Reeves, who must find funds to plug a budget shortfall and reassure voters that Labour can deliver on the promises made during the election. Reeves has already warned of “difficult decisions” on public services, which are beginning to creak.
European Central Bank president Christine Lagarde couldn’t find it in her herself to lighten the mood. Lagarde compared the current challenges to those of the 1920s, although she did offer the caveat of a far more sophisticated policymaking toolbox to counter risks.
From today, markets will again be watching a busy lineup of economic releases. Thoughts will also turn to the Middle East, where it’s feared ever increasing tensions will spill over into a broader conflict.
Here’s what to look out for this week…
Flash HCOB Manufacturing PMI for Germany starts things off with a bang this morning. S&P’s UK edition of its services PMI study will also be under the microscope.
Tomorrow’s German Ifo Business Climate for September will be of interest to euro investors, before more German data arrives on Thursday with GfK Consumer Confidence.
The US has a packed schedule of data to end the week, with GDP, durable goods and Core PCE all on the schedule. France will also report inflation figures for September.
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GBP: Cloud nine
Sterling continues to benefit from central bank developments and reached multi-year highs against the euro and the US dollar last week. However, with the Bank of England likely to act again before the end of the year, the present euphoria may not last.
GBP/USD: the past year
EUR: Finding positives
The euro has struggled versus the pound of late. The one silver lining is that EUR/USD posted another positive week and opens the week hovering around its highest in a year.
GBP/EUR: the past year
USD: Fed bombshell
The Federal Reserve’s bold 0.5% cut sent stock markets into ecstasy, yet it had the opposite effect for the US dollar. The US dollar immediately fell against its rival currencies, although it may recover should growth remain at manageable levels.
EUR/USD: the past year
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