Last week Sterling began to trade higher against the Euro & Dollar- hitting 1.1280 against the Euro and crossing 1.25 against the U.S Dollar. The Euro weakened significantly last week following the ECB’s decision to cut deposit rates and re-start QE; which put strength into U.S Dollar and Sterling. The markets are now watching the Fed & BoE this week to see what happens next with their interest rates.
On Wednesday the UK will release CPI (Inflation) figures for August and we are expecting to see a slight drop to 1.8% (Just below the 2% target), which shouldn’t have much of an effect on the market- as it is not enough of a drop to urge the Bank of England to do anything on Thursday.
On Wednesday night the Fed is expected to cut interest rates by 25bps – which in theory, should weaken the U.S Dollar further. However, previous cuts in rates have strengthened the Greenback following Fed meetings, so I would trade USD with caution through Wednesday. As the cut is expected and priced in- markets will be waiting to hear what forward guidance the Fed gives in regards to future interest rate decisions and about any stimulus in the future.
On Thursday we have the BoE rate decision, where we are not expecting to see any movement. Markets will be waiting to see what Governor Mark Carney has to say about what the Bank has planned for the UK’s exit from the EU- The Bank hinted a few months ago that they are ready to cut rates if necessary, and any expansion on this following the meeting could move the markets.
Alongside the above, Brexit will still continue to be the main driver of the Pound, especially with retail sales data this week as well. Recent UK data has eased risks of the UK entering a recession anytime soon- which, alongside the fact that a No Deal Brexit is relatively impossible now, is giving the Pound a significant boost. Risks of a General Election still remain for November at the earliest- but we will have to see what happens with the Oct 31st Brexit deadline first before we look ahead at the next moves for UK Government.