It will be a busy week for cable traders, with several key events that could affect the pound, some of which are hard to predict given their political nature. This could leave the market a bit depressed at the beginning of the week as traders price in higher risk, paving the way for larger moves going forward.
On Monday, the former Mayor of Birmingham, Andy Burnham, is expected to be sworn in as the UK’s seventh prime minister in just a decade. As yet, it’s not known who will be in his cabinet, and a key issue for the markets is who will be Chancellor going forward. Given the delicate condition of the UK’s finances and the hovering deficit hawks, this could be the most crucial factor affecting the pound this week. It could even overshadow the normally market-moving jobs and inflation data coming out on Tuesday and Wednesday, respectively.
Keep the Rules, Carry On
The markets seem to widely expect that Chancellor Rachel Reeves will be replaced. There is some hope that she may retain her post after the UK economy returned to growth in May, and this would help reassure markets. Her fiscal rules have generally helped keep the deficit hawks from pushing gilts higher and weighing on the pound. So, if the surprise is that Reeves will remain chancellor, the market would likely react positively.
On the other hand, who replaces her is just as important a question. Over the weekend, the deputy Labour leader said that the Burnham government would maintain the party’s Manifesto, but act “bolder”. This seems to have been widely interpreted by the market as signalling that whoever becomes Chancellor will stick to the existing fiscal rules. That would largely reassure markets, but it is understood to be the status quo. In other words, the market would have a minor reaction and instead focus on the data. A negative surprise would be the appointment of someone who is understood not to share Reeves’ fiscal views, which could leave the pound weaker until there is some clarity on their policy.
The Market on Hold
The consensus among economists is that Burnham will leave the economy on an even footing, though it will not show substantial growth. This is hoped to reinforce the commitment to maintaining the current rules and reassure markets. So, the upcoming data could shake up markets not just because of its implications for the economy, but also because a change in fiscal direction could weigh on market sentiment.
UK May unemployment is expected to remain unchanged at 4.9%, with new hires easing to 70K from 100K previously. This would maintain the impression that the British labour market remains resilient despite slower hiring, a condition that generally inclines the BOE to ease as long as inflation remains under control.
UK Inflation Easing
The consensus for the UK headline June CPI is for it to ease to 2.6% from 2.8% previously, amid lower gasoline prices as the situation in the Middle East eased last month. The core rate, which is more closely followed by the BOE, is anticipated to tick down to 2.5% from 2.6%. However, markets might look past this data given the resurgence in Brent prices amid increasing fighting over the Strait of Hormuz.
So far, the market is pretty confident that the BOE will not raise rates during the upcoming meeting at the end of the month. However, there is less certainty beyond that, and rising inflationary pressure could raise the odds of a hike. As the British economy remains in the green, this could support the pound, assuming no major surprises on the political front.
