European currencies were buoyed by progress in negotiations to end the Middle East war over the weekend, though a peace deal remains elusive.
There were signs of progress on a peace deal in the US-Iran conflict over the weekend, though the chances of an imminent end to the stand off seemed to recede on Tuesday after the US conducted overnight strikes on Iranian defences. According to Iranian officials, the proposed deal, which would include the reopening of the Strait of Hormuz, was still some way off, dashing hopes that a treaty could be signed early this week.
Nevertheless, markets took heart at the possibility of peace, pushing both the euro and the pound higher against the dollar last week. The pound hit a two-week high against the US currency, while the euro recovered recent losses. Europe has been harder hit by the disruption to world trade, with data pointing to a contracting eurozone economy amidst a surge in living costs.
UK rate expectations soften
Markets think signs of new vulnerability in the UK economy may reduce the chances of an interest rate hike in the coming months. Figures released last week showed weakening retail sales and a contraction in private sector activity. Investors now think the Bank of England (BoE) could continue with a ‘wait and see’ stance for the time being.
In Europe, money markets continue to price in two European Central Bank (ECB) rate rises this year, with forecasts pointing to inflation approaching 4%, after climbing to 3% in April.
The week ahead
Exchange rates could fluctuate significantly if a peace deal between the US and Iran is achieved this week, or if negotiations stall again. Important data this week includes consumer confidence in the US (Tuesday) and EU (Thursday), and GDP growth in the US (Thursday). House price data will take centre stage in the UK on Friday.
