• Joel

GBP RISK: a Big Week Approaching for Pound Sterling

A big week for GBP is approaching, with four key data points and a key rate decision from the Bank of England to consider, all before thinking about further Brexit related commentary. 

Things kick off for GBP on Tuesday, with UK PM Johnson's scheduled to have a call with EU Commission President von der Leyen & Council President Charles Michel at 1330BST/0830EDT. Given how negotiations have gone recently, no progress will be expected on the future UK/EU relationship - but could we be in for a positive surprise? 

The chances of a breakthrough in negotiations are always higher when top-level officials are involved (like the PM himself and EU Commission President von der Leyen). Might we get some movement on current sticking points (fisheries, level playing field, governance). Might Johnson indicated that the UK is open to an extension? 

If either of these happened, this could be a big plus for GBP. 

Moving on to Tuesday, we have the latest UK Labour Market report. The timeliest aspect of the report, the May claimant count change (i.e. the number of new people claiming unemployment benefits) is seen dropping to 370k from 856k in April. Alongside this, the unemployment rate is seen rising to 4.5% (in April). 

These numbers are really not that bad compared to, say, the US. But this is only due to the government’s furlough scheme, in which it recently revealed it is subsidising some 8.7mln jobs, which aren’t included as unemployed - in other words, without the government wage subsidy scheme, most of these jobs would be at risk. 

The labour market data is therefore set to be skewed by this government programme going forward, and will thus become much more interesting from August onwards, after which government support is set to be gradually withdrawn. 

Moving onto Wednesday, we have CPI data. This ought to show soft inflation in the UK, a side effect of the demand shock caused by Covid-19 and the great lockdown. Soft inflation gives the BoE the leeway it needs to continue with its historically dovish policies (more on that is a second). 

Moving on to Thursday, we have the Bank of England meeting - likely the most volatility inducing moment of the week for GBP. 

At the current rate of asset buying, the BoE only has two weeks left of asset purchases, thus most analysts agree that it makes sense for the bank to give the size of its QE programme a decent-sized boost (most expect £100bln). 

Another focus heading into Thursday's meeting is what kind of other extraordinary or new easing measures the BoE could implement, given the recent talk about negative interest rates. However, most analysts don't think that the time is right just yet for negative rates. 

“For one”, note TD Securities, “we think that the BoE would want to make that kind of announcement at an MPR meeting, where it would have a better chance to explain itself and justify its decision through an MPR and a press conference”. Moreover, adds the broker, “we don't think the MPC will have enough new information on the recovery since its May meeting to determine exactly how much further to ease, and whether QE alone can get the job done.” 

Depending on the size of the QE package and what Governor Bailey reveals about the bank’s thinking towards negative rates, GBP could be choppy. 

Finally, moving on to Friday, we have retail sales for May. A decent M/M recovery is expected in May, given just how badly depressed retail sales spending was in April (the first full month of lockdowns).



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