The pound extended its recent rally last week, with GBPEUR rising around 0.6% to its strongest level in twelve months and GBPUSD gaining roughly 0.5% to touch a three-week high. Markets continued to unwind the political risk premium built up ahead of the change in Prime Minister, with Andy Burnham now widely expected to take office through an orderly transition.
His stated commitment to the government’s existing fiscal rules has reassured investors, while the Bank of England’s June decision, at which two policymakers voted for a rate rise, has kept expectations of tighter UK policy alive. Attention now turns to Cabinet appointments, with the choice of Chancellor viewed as a key signal for the direction of fiscal policy and, by extension, the pound.
Dollar pulled in two directions
The US dollar traded unevenly. A much weaker than expected June payrolls report initially trimmed expectations of further Federal Reserve tightening and softened the dollar, before renewed tensions in the Middle East revived safe-haven demand. US strikes on Iranian military sites, following attacks on merchant shipping near Oman, have disrupted flows through the Strait of Hormuz and lifted oil prices. Tuesday’s US inflation release and Fed Chair Kevin Warsh’s first semi-annual testimony to Congress will set the tone for the dollar, and therefore for GBPUSD, into the second half of July.
Euro on the back foot
The euro remained under broad pressure. Softer than expected eurozone inflation in June has prompted markets to scale back expectations of further European Central Bank tightening beyond its June rate rise, leaving the single currency lagging both the pound and the dollar. EURUSD stayed capped despite a late-week dip in the greenback, while an improvement in eurozone investor sentiment offered only limited support.
The week ahead
Tuesday 14 July
- US inflation figures for June, alongside the first day of Fed Chair Kevin Warsh’s semi-annual testimony to Congress. The week’s biggest risk event for GBPUSD.
Wednesday 15 July
- Second day of Fed testimony, plus eurozone industrial production for May, a secondary driver for GBPEUR.
Thursday 16 July
- UK GDP estimate for May, with a modest return to growth expected, alongside UK industrial production and trade figures. The key domestic test for the pound.
Friday 17 July
- Andy Burnham could be formally confirmed as Labour leader if no other valid candidates are nominated, which would cement the orderly transition markets have welcomed.
With GBPEUR trading at the top of its recent range, businesses with upcoming euro requirements may find it a sensible moment to review their exposure with their currency specialist.
