Cable’s upward surge came to a halt this week, at least for now. But the upward gains in the currency pair haven’t been so much due to the pound’s strength. Rather, weakness in the dollar has been the largest contributing factor. When compared to other currencies besides the dollar, the pound shows more weakness as a result of domestic issues.
Friday’s data could give some valuable insight into where the pound could go from here. Last month’s inflation data underperformed, but was still above target. It appears that consumers are still being affected by high inflation. Now the concern from the BOE is that the economy will underperform in the face of tariffs. That implies potentially more easing is on the way, which could further weaken sterling. Though if the dollar is even weaker, cable does have some room to the upside.
A High, and Then What?
Earlier this week, cable hit a 7-month high as the dollar weakened amidst concern that US President Donald Trump would try to fire Fed Chair Jerome Powell. But, this proved to be a peak for the pair, after Trump said he has no intention of dismissing the head of the Federal Reserve. On the one hand, this shows that the pair is highly dependent on what’s going on with the dollar at the moment.
On the other hand, it indicates a skittish market that is moving on rumors and is quick to reverse moves. That’s important considering the magnitude of cable’s move over the last couple of weeks. Now that the Fed issue is over, markets are turning to the next major event. That’s in a couple of weeks when the BOE is expected to cut rates while the Fed holds them steady. This further widening of the gap in interest rates would be seen as negative for sterling.
Why the Pound?
Europe has pledged substantial increases in government spending this year, which has contributed to expectations for higher economic growth despite the effects of tariffs. Britain, on the other hand, has not. With the Chancellor promising to not raise taxes, spending in the UK is expected to be constrained while British consumers face higher prices. All of this has led the IMF to cut its growth forecast for the UK to just 1.1% this year, down from 1.6% previously.
This was echoed by BOE Governor Andrew Bailey on Wednesday who expected slower economic growth as a result of the tariffs. With inflation coming down, the BOE might shift gears into more easing for the rest of the year, which could put sterling in a weaker position when compared to the Euro. And, naturally, if a deal is reached around tariffs, then the market could reverse most of its moves for the last couple of months.
What the Data Says
Faced with a difficult external scenario, the UK consumer becomes more important to keep up growth. Which is why retail sales data coming out on Friday gets more focus, as dwindling demand would translate into lower inflationary pressures. That, in turn, gives the BOE more room to ease.
UK March retail sales are expected to turn negative at -0.3% compared to 1.0% growth in the prior month. Gfk will also publish a survey of consumer confidence a little before that, expected to fall further negative to -20 from -19 prior. But, in the past, this figure has a habit of surprising to the upside.
