The Weekly Round-up

Last week, the lack of compelling data resulted in limited market movements. However, the real action took place on Wednesday, centered around key speakers. Powell, Bailey, and Lagarde all delivered hawkish speeches, and it was the US that reaped the most benefits. The markets had anticipated the Bank of England and the European Central Bank to continue hiking rates throughout the year. Meanwhile, the Fed was expected to gradually slow down their rate hikes, as they were the first and most aggressive in initiating them.

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However, Powell's announcement this week shattered those expectations. The Fed is now anticipating further rate hikes throughout the year. This shift in stance was supported by stronger-than-anticipated GDP figures, which came in at 2% instead of the forecasted 1.4%. Additionally, unemployment figures released yesterday were lower than expected. These inflationary economic indicators provide further support for the Fed's decision. However, for the average person, this news might be concerning, as it suggests that interest rates may exceed the expected terminal rate of 5.75%.

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Despite the pound experiencing steady losses since the beginning of the week, with the heaviest losses occurring in the past couple of days after the speeches on Wednesday, it has managed to maintain a strong position against both the euro (EUR) and the US dollar (USD). Furthermore, when comparing the pound to many Asian currencies, particularly the Japanese yen (JPY) and the Chinese yuan (CNY), it has been a notably strong week. GBP/CNY has been trading at its highest level since 2019, while GBP/JPY has reached its highest level since 2015.

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The burning question on everyone's mind is how long this strength in the pound will last. As we approach the first week of July, there is little data from the UK that is expected to significantly impact the markets. The major data release to watch out for is the Non-Farm employment data from the US, which is scheduled for next Friday. However, the most challenging factor for the pound in the coming days is likely to be political uncertainty.

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Over the past few years, British politics has been marred by mayhem, with figures like Boris Johnson, Liz Truss, Kwasi Kwarteng, and Nicola Sturgeon contributing to a sense of farce. Rishi Sunak yesterday faced his biggest challenge yet. The policy on Rwanda, supported by both Sunak and Suella Braverman, was ruled unlawful. This setback will undoubtedly impact a Prime Minister who has struggled to gain support within his own party and among the public. Boris Johnson's allies and Sunak's opponents could seize this opportunity to deepen divisions within the Conservative Party.

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Such internal conflicts would be viewed by the markets as a threat to the stability of the UK's economy. Any significant shifts in power or a descent into infighting may lead to the return of the US dollar's safe haven status, as investors seek more stable alternatives.

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In summary, the markets were largely influenced by the speeches of key figures last week. The Fed's indications of continued raising of interest rates throughout the year surprised, and positive economic data further supported this move. Despite the pound experiencing losses, it has maintained a strong position against major currencies, particularly in relation to Asian currencies. Looking ahead, political uncertainty in the UK, driven by recent events and potential infighting within the Conservative Party, may pose challenges for the pound's strength. Investors will closely monitor these developments and their potential impact on market stability.