Week Ahead: Sterling to Sink to Greater Depths?

The selloff across bonds, stocks, and even cryptos has taken a steeper dive so far this month, amid worries that central bank rate hikes could choke the global economy.

Economic Calendar for Next Week

Investors and traders worldwide will be scouring the following economic data and events in the coming week, looking for reasons as to whether the selloff should be extended or perhaps take a breather:

Monday, May 16

JPY: Japan April PPI
CNH: China April industrial production, retail sales, property sales, and unemployment rate
EUR: EU Commission releases Spring economic forecasts
USD: New York Fed President John Williams speech

Tuesday, May 17

AUD: RBA releases May policy meeting minutes
GBP: UK March unemployment and April jobless claims
EUR: Eurozone 1Q GDP and employment
USD: US April retail sales and industrial production
USD: Fed speak
Fed Chair Jerome Powell
Chicago Fed President Charles Evans
Cleveland Fed President Loretta Mester
Philadelphia Fed President Patrick Harker
St. Louis Fed President James Bullard
Q1 earnings: Walmart, Home Depot, Vodafone, JD.com

Wednesday, May 18

JPY: Japan 1Q GDP
GBP: UK April CPI and PPI, BOE MPC member Catherine Mann speech
US crude: EIA weekly US crude inventories
CAD: Canada April CPI
USD: Philadelphia Fed President Patrick Harker speech
Q1 earnings: Tencent, Target

Thursday, May 19

JPY: Japan April external trade
AUD: Australia April unemployment
ZAR: South Africa Reserve Bank rate decision
EUR: ECB publishes April meeting accounts
USD: US weekly initial jobless claims
Xiaomi Q1 earnings

Friday, May 20

JPY: Japan April CPI
GBP: UK April retail sales, May consumer confidence
EUR: Eurozone May consumer confidence

British Pound Latest Moves and Fundamentals

The GBP index, which measures Sterling’s performance against six of its G10 peers in equal weights, is trading around its lowest levels since December 2020.

This index could return to recent lows if the coming week’s data on jobs, inflation, retail sales, and consumer confidence point to more economic woes.

After all, the Bank of England recently highlighted the risk of a recession by year-end.

Darker clouds over the UK economic outlook should keep the GBP index firmly entrenched in the downtrend that has persisted since February, potentially sending this index back towards the 1.47 mark.

The growing downside risks to the UK economy, which are expected to narrow the window of opportunity for further BOE rate hikes, have allowed most of Sterling’s G10 peers to maintain a year-to-date advance against the Pound.

Even the beleaguered euro has seized the opportunity to break out of its downtrend against GBP that had been in place since September 2020.

Last week, EURGBP secured a weekly close above its 50-week simple moving average for the first time since January 2021.

And with King Dollar reigning supreme across the FX universe, GBPUSD has been sent to its weakest levels since November 2020.

GBP/USD Price Forecast

We may see even more US dollar strength in the coming week if the scheduled Fed speak does little to douse the prospects of a 75-basis point US rate hike over the summer months.

Such perceived signals for an ultra-hawkish Fed, coupled with dismal data out of the other side of the Atlantic, should heap more downward pressure on GBPUSD and potentially drag ‘cable’ closer to the psychologically-important 1.20 line.

Although GBPUSD’s 14-day relative strength index has broken below the 30 threshold that denotes oversold conditions, any recovery should prove fleeting, as long as the UK economic data suggests that a recession is inevitable and binds the BOE’s hawkish hands, all while the Fed presses ahead with rate hikes galore.

By Lukman Otunuga Senior Research Analyst