The pound has risen against the euro and the US dollar but may struggle to extend its rebound. The pound to US dollar exchange rate could be close to posting its first monthly gain of the year. However, analysts remain cautious on the possibility of a more meaningful rally considering the divergence between the economic outlooks for the US and UK as well as the differences between the outlook for the Fed and BoE policies.
Investors will possibly become more active on Tuesday with the return of US market participants following the Memorial Day public holiday. From Thursday into the end of the week, the UK markets will also close for a long public holiday weekend for the British Queen’s Platinum Jubilee celebration.
Economic data such as May’s Conference Board Consumer Confidence survey out on Tuesday, ISM Manufacturing PMI survey data and April JOLTs Job Openings data out on Wednesday, and May’s labour market report on Friday, could create volatility.
Positive market mood
The risk-on mood has helped the pound and weighed on the safe-haven US dollar as investors expect the easing of Covid-19 restrictions in China to support the global economy.
UK Chancellor’s £15 billion cash giveaway
Sterling was also supported by expectations that the UK Chancellor Rishi Sunak's £15 billion cash giveaway would boost UK consumer confidence in the coming weeks. Sunak announced that more funds will be available to households which are struggling with the cost-of-living crisis.
The UK-EU disagreement over the Northern Ireland protocol has kept markets slightly cautious as the UK’s intension to override parts of a Brexit deal has raised concerns of a potential trade war amidst the cost-of-living crisis. Furthermore, a rate hike by the BoE could hurt the UK economy and will limit any further gains for the GBP/USD pair.
Economic data to influence the pound
For this week, broader market sentiment and the release of the ISM Manufacturing PMI on Wednesday, the ADP report on Thursday and the jobs report (NFP) on Friday will influence the USD and provide direction to the GBP/USD pair.
Sterling has remained supported due to rising expectations of an interest rate hike by the Bank of England. Investors are also in a wait-and-see mode ahead of the important European Union summit which started this Monday. The flash German consumer inflation figures and Eurostat’s release of Eurozone inflation in May could influence the euro and provide direction to the EUR/GBP.
The market is pricing in 50bp rate hikes for the euro area, but some analysts doubt the ECB will raise rates more than 0.5% in July. This could be a risk for the pound, especially if the May inflation figures are better than expected. As some analysts noted, the risk is May’s CPI data, as it can rise from 7.4% to 8.2% or higher, as Nomura currency strategists said. For the euro, Eurozone inflation and the ECB policy are the main drivers this week.
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