The British pound remained largely stable on Monday as market participants braced themselves for a week filled with central bank decisions and important economic data. The focus for the day
was on the UK jobs market, with expectations that the upcoming report could influence the Bank of England's actions next week.
Despite the surprising resignations of former Conservative Prime Minister Boris Johnson and two other lawmakers over the weekend, the currency market showed minimal reaction to the political developments in the UK.
Currently on track for its third consecutive quarterly gain against the US dollar, the pound edged up 0.1% to $1.2594.
Overall, volatility in the broader financial market remained subdued as traders prepared for a series of central bank decisions on interest rates, commencing with the US Federal Reserve meeting on Wednesday.
Market consensus anticipates that the Fed will maintain US interest rates within the range of 5.00-5.25%. However, Tuesday's release of the Consumer Price Index (CPI) report will provide further insights into the central bank's future actions, considering the persistent high inflation levels.
Expectations have also increased regarding the Bank of England's inclination to continue raising interest rates beyond the current 4.5% level, which has supported the strength of the pound. However, at present, the focus remains primarily on the US dollar.
Adam Cole, a strategist at RBC Capital Markets, commented, "If I were playing sterling, I'd be doing it more on the crosses than through cable," suggesting that the risk for sterling lies more with the dollar than with internal UK factors.
Against the euro, the pound fell 0.2% to 85.61 pence. This marks the sixth consecutive monthly gain for the pound against the euro, largely influenced by the potential divergence in interest rate policies between the Bank of England and the European Central Bank.
In terms of UK political risk, the resignations of Johnson and two other lawmakers have raised concerns, leading to upcoming by-elections. Stephen Gallo, a global FX strategist at BMO Capital Markets, noted that the likelihood of a general election in 2023, rather than next year, has increased. However, he suggested that a significant drop in the pound would be unlikely unless the gilts market reacted negatively to the political developments.
As the week progresses, market participants will closely monitor key data releases, including GDP, CPI inflation, and public sector net borrowing, which could provide insights into the economic outlook and potentially impact the pound's performance. Photo by PPP, Wikimedia commons.