Published: 04/07/2022 By ECAPMost economic data out of the UK last week came out largely as expected, with one glaring and worrisome exception: the current account deficit, which surprised to the downside and is now in the high single digits as a percentage of GDP. Of course, these numbers are clouded by the massive increase in energy prices, where the UK is an importer, but nevertheless this is a key indicator to watch. No major news this week means sterling will trade off developments elsewhere, though there are a few Bank of England speeches on tap. Any indication that policymakers are erring towards raising rates by 50 basis points at the next MPC meeting in August would be positive for the pound, and may trigger a recovery rally from currently suppressed levels.
Recession fears are now driving currency markets, more than central bank policies or interest rate differentials, and the dollar has benefitted. Last week was no exception. As stocks retreated and government bond rates saw
record falls, the greenback rose sharply against all its major peers except for the Japanese yen, which seems to be trying to regain its status as a safe-haven currency. Emerging market currencies fell against the dollar, but for the most part held their own against European currencies, as cheap valuations and massive interest rate differentials in their favour seem to be enticing at least some investors. Recession fears have intensified, to an unwarranted extent in our view. That makes this week's payroll report out of the US key. Markets expect another strong report, with above-trend job creation numbers, record low unemployment and healthy nominal wage increases, which should help alleviate fears somewhat.