Sterling’s Performance Reflects Low-Key Week

Both the Bank of England (BoE) and Federal Reserve (Fed) published the minutes from their respective monetary policy meetings this week. Neither resulted in any surprises and were accordingly overlooked by currency markets.

The Fed and BoE have seemingly flinched as the first half of 2015 sees the British and American economic recoveries lose momentum. Fed Chair Janet Yellen and BoE Governor Mark Carney both emphasized patience and a reliance in stronger data before committing to tighter monetary policy.

Consensus expectations now have an American rate hike penciled for some time between Q4 2015 and Q1 2016. Meanwhile the BoE is expected to be sidelined until Q2 2016. The expectation that the Fed will engage in interest rate hikes before the BoE presents significant risks to GBPUSD’s post elections gains.

This week also saw the April Consumer Price Index (CPI) number print -0.1%, indicating that the British economy slipped into deflation for the first time since 1960. The prospect of a short period of deflation has been well telegraphed by the BoE, so currency markets have had plenty of time to digest the thought. As such Sterling’s performance this week hasn’t been materially set back. In fact thanks to some stronger than expected Retail Sales data Sterling has broadly rallied against many currencies, including the Euro. Although the British unit is set to end the week lower against Greenback as the deflationary data supports the expectation of interest rate hikes in the United States before Britain.

Next week’s data calendar is sparse looking. However given recent volatility, especially in Sterling, this might be a welcomed opportunity for currency markets to take stock. Over the last couple of weeks GBPUSD has rallied as much as 8 cents following a pre-election trough near 1.51. GBPEUR has gained similarly, the pair pushing up to 2-month highs this week and is eyeing the 8-year high established in mid-March.

Monday is a Bank Holiday in both the Eurozone, United States, and Britain, suggesting that choppy trading driven by thin holiday liquidity might characterize activity. The week commences in earnest on Tuesday, however there is no top-tier data from this side of the Atlantic to be aware of, nor is there any central bank activity expected. The key local event risk next week once again comes from Greece, for which there are concerns about the government’s ability to pay its bills. Salaries of civil servants and pensions are due at the end of May, followed by a series of debt payments to the IMF totaling about €1.2-billion by June 12th. As it stands Greece doesn’t have the cash to make all of these payments and by mid-June will effectively be bankrupt unless another 11th hour deal with lenders can be reached. Lately a sense of exhaustion and lethargy when discussing Greece has crept into the Euro. The common currency largely ignoring negative headlines related to the Hellenic republic, however the coming weeks present a real concern and as the deadlines approach the common currency could come under renewed pressure.