Global Themes

UK data could egg on Sterling; the week ahead
View our Brexit Scenario Guide here.

- Brace for big UK data week
- Second referendum whispers grow louder
- Flash-crash risks in trimmed trading
- China’s GDP growth eyed
- Euro records best week in months

GBP

Brace for big UK data week
It’s a big week of economic data and with UK Parliament on Easter recession until April 23, Brexit might take a back seat for now, although any major updates will take precedence in driving Sterling’s value. Nevertheless, UK labour market data will be released on Tuesday with earnings expected to rise again and inflation is due on Wednesday, which is also forecast a tick higher to 2%. Retail sales wraps up the short working week on Thursday.

The conditions in the UK labour market have been improving with unemployment below 4%, a 44-year low, and average earnings continuing to grow steadily in the face of Brexit angst, with basic pay rising by 3.4% in the three months to January. Real pay, adjusted for inflation, is rising by 1.4% excluding bonuses. The Bank of England (BOE) will be keeping a close eye on these numbers as a way of assessing when to pull the trigger on an interest rate hike, though as long as Brexit uncertainty remains in play, the BOE is likely to stay on hold.

If this week’s data surprises positively, this could inflate demand for Sterling. The pound could thus appreciate and allow GBP/USD to retake the $1.31 level and test $1.32 again, while GBP/EUR could retest the €1.16-€1.17 area. 

Brexit

Second referendum whispers grow louder
There is a growing possibility of a second referendum brewing, which is expected to boost Sterling higher. It seems more UK lawmakers are considering the option as a way to break the parliamentary paralysis and decipher a way forward in the deadlocked Brexit process.

Last Friday, UK finance minister, Philip Hammond, said the chances of a second referendum being put to Parliament is growing more likely despite the government’s opposition to one. If the cross-party talks between the Labour party and the Conservatives fail to reach a compromise, the Labour party may eventually back a second referendum as a strategy to win a majority at the EU elections in May.

Sterling would likely react positively to this news in expectation of a remain vote winning. GBP/USD could test year-to-date highs near $1.34 and GBP/EUR challenge the €1.18 handle for the third time since mid-2017.

Short week risks

Flash-crash risks in trimmed trading
This week marks the first of four straight shortened weeks due to a number of public holidays in Europe and Japan. As a result, there will be fewer traders in the markets - lower liquidity, which could ignite erratic price action and risk of volatility spikes and potentially mini flash-crashes.

Despite the multitude of risk events including Brexit uncertainty, financial markets have been relatively calm and stable lately, with many traders hesitant in betting big in any direction, particularly on the pound. FX price swings have fallen to their lowest levels in several years according to Reuters. In the event of a flash crash amid sleepy markets with no downside protection in place.

Sterling is vulnerable to falling lower as it is deemed a riskier currency due to its increased sensitivity to political news. Safe-haven currencies, particularly the Japanese Yen, tend to appreciate in such market events.

China GDP

China’s GDP growth eyed
An array of economic data is due from China on Wednesday morning at 3:00am. As well as retail sales and industrial output, the first quarter GDP figure for 2019 will be released, and the result should steer risk sentiment.

Many investors believe the trade truce between the US and China is priced into financial markets, which helped boost demand for riskier currencies last week. However, should this pivotal data provide further insight into the negative impact of the US-China trade war, risk sentiment may sour. China’s GDP data will provide a glimpse on the health of the world’s second-largest economy. 

EUR

Euro records best week in months
The Euro scored its biggest weekly rise against the US Dollar since September 2018 last week, pulling away from the key $1.12 support zone and recapturing the $1.13 handle. Despite an overly dovish European Central Bank meeting last week, investors cheered a boost in risk sentiment and sold the US Dollar in favour of riskier assets, which included the Euro.

This week, eyes will be on economic data from the bloc, which kicks off with German ZEW surveys at 10:00am on Tuesday. The final inflation figure for March will be unveiled on Wednesday and the more important flash European PMIs will be published on Thursday.

The Euro’s slow recovery remains intact but will likely take cues from these data pieces for further evidence of economic recovery in the Eurozone before being able to appreciate further.




Deliver the Daily Currency Market Analysis to my Inbox

Published five days a week, this newsletter provides day-to-day trends and activities affecting the market in easy-to-understand snapshots.