Sovereign International Daily Market Report
Pound soars to June 2022 highs against fragile US dollar
Sterling jumped to its highest level in ten months on the broadly weaker US dollar on Tuesday, as investors continued to dismiss the possibility of a wider fallout from the recent banking turmoil.
Since the start of 2023, the pound has been the best performing currency in the G10, having extended its gains on the dollar to more than 3.5% for the year yesterday. As we’ve mentioned in the past few weeks, part of this appreciation can be attributed to the isolation of the UK banking sector to the recent crisis. Investors have also grown increasingly confident that Britain’s economy will perform better-than-expected this year, which has contributed to the extent of the move. Indeed, fears of a UK recession have diminished at a rather remarkable rate in recent weeks, partly in light of the sharp drop in natural gas prices, the relative stability in the political environment and the more optimistic appraisal of the UK economy from both the OBR and Bank of England.
Bank of England MPC member Silvana Tenreyro warned on Tuesday that the bank may need to cut interest rates earlier and faster than previously anticipated in order to avoid an undershoot in the inflation target. Tenreyro is one of the most dovish members of the rate-setting committee, and investors completely ignored her remarks yesterday, judging them as not indicative of the general stance within the MPC. If anything, markets now appear increasingly confident that the BoE still has a little way to go before it calls time on its hiking cycle, with swaps now largely pricing in two more 25bp hikes at upcoming meetings. This helped GBP rally by almost 1% on the USD on Tuesday, making it one of the better performing currencies in the world.
Meanwhile, the dollar itself was broadly weaker during London trading, as some mixed US economic data clouded the outlook for Fed monetary policy. This week is packed with a number of data releases on the US labour market, culminating in Friday’s all-important nonfarm payrolls report. News out so far this week has been rather mixed, with a sharp drop in job openings only partly offset by an increase in quits, which tends to be a sign of increased confidence. According to the monthly JOLTs survey, US job vacancies declined to 9.93 million in February, well below the 10.4 million consensus, and the lowest level since 2021.
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FOMC members will likely view this drop in job openings as a welcome sign of an easing in labour market conditions, particularly given its possible impact on suppressing wages. As things stand, markets are largely pricing in another 25bp rate hike from the Fed at its next meeting in May, although it appears increasingly likely that this will be the last in the current cycle. Friday afternoon’s nonfarm payrolls report could more-or-less confirm these suspicions should we see further signs of a cooling in labour market conditions, particularly an easing in earnings growth. In the meantime, investors will be keeping a close eye on today’s US PMI data from both S&P and ISM, and the ADP employment change number, which tends to provide a decent gauge as to the strength of the headline NFP print.
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