The theme from last week has continued strongly into this week, with USD strength remaining the dominant force in the markets. Once again, inflation has taken centre stage, with a plethora of key data points and influential speakers drawing the attention of traders, central banks, and analysts alike. The collective focus is on gauging the extent to which inflationary pressures have subsided following a prolonged period of elevated interest rates.
The week commenced with the release of Retail Sales figures in the US. Despite the Federal Reserve’s tightening policy, the US economy appears to be holding up admirably. Consequently, it came as no surprise when the results surpassed expectations, with Core figures showing a 1.1% increase compared to the forecasted 0.5%. This impressive outcome is further underscored by the previous reading of 0.6%, which also outperformed forecasts. Moreover, month-on-month retail sales experienced a notable upswing, with final figures reaching 0.7%, exceeding the anticipated 0.3%.
In a recent statement, Jerome Powell expressed his belief that the US will maintain higher interest rates for an extended duration. Considering the consistently robust economic figures, this assertion appears plausible, especially amidst a backdrop of the UK economy decelerating. Such circumstances suggest a potential resurgence of USD dominance in the market. Furthermore, heightened geopolitical tensions, particularly following Israel’s retaliatory strike on Iran this morning, have amplified concerns of a broader conflict in the Middle East. This has prompted fears of geopolitical instability, reminiscent of the market crash of late 2022 when the EUR/USD pairing dipped below parity, closely followed by the GBP/USD pairing.
Conversely, the UK economy presents a contrasting picture this week, with CPI figures once again registering a marginal decline. Headline inflation decreased from 3.4% to 3.2%, slightly below the anticipated 3.1%. While this could have potentially spurred market movement, the actual impact was minimal, likely due to the result aligning closely with forecasts. Similarly, today’s retail sales figures mirrored this subdued trend, showing no growth against a forecasted 0.3% increase. Consequently, the Pound experienced a slight decline, though this was largely anticipated by the markets. In his address on Tuesday, Andrew Bailey hinted at the possibility of the UK initiating rate cuts in the upcoming meetings. This stands in stark contrast to Powell’s stance, indicating a challenging period ahead for the Pound against the USD. Nevertheless, one positive note for the Pound is the Eurozone’s economic slowdown and Christine Lagarde’s dovish tone, which briefly propelled the GBP/EUR pairing to near two-year highs before retracing to previous levels.
Looking ahead to the coming week, all eyes are on Tuesday, dubbed as PMI Tuesday, likely to be the highlight of the week. While recent releases of PMI data have not sparked significant market movements, the simultaneous release of figures from the UK, US, and Eurozone could potentially inject volatility into the markets. Additionally, the week ahead is predominantly filled with heavy US data releases, with particular attention on Thursday’s Advance GDP figures. Naturally, the global community remains apprehensive about developments in the Middle East, with market reactions poised to closely mirror geopolitical shifts.
