Last week saw relatively little data or surveys of note released. But the risks around the Euroland economy appeared to build, and there were further signs of a disconnect between pricing and demand in the UK housing market, which indicated that a lack of supply was an overriding issue in that sector. 

Meanwhile in GBPUSD, at the start of last week the pound hit its high at just below $1.27, and reached its low of $1.26 at the end of the week. The tight trading range it remained within continues to indicate that the markets are waiting for a signal, perhaps from the central banks, to indicate when and by how much they intend to reduce interest rates, and how much this might differ to market expectations. 

The risks on that appear to be building. Markets have continued to price out rate cuts from all the major central banks, and that being despite evidence from the UK and Euroland economies that all is not well. GBPUSD might have one last try higher and GBPEUR may get support from the weaker Euroland environment. But there are risks building in FX markets from a lack of corporate hedging activity, a real money/hedge fund sector that appears to be side-lined, and from a macroeconomic perspective, geopolitical and market risks as well, in my opinion.

In the UK this week, a lot of the focus is likely to be on the Chancellor’s Spring Statement on Wednesday at 12:30pm. According to the Sunday Times, the Office for Budget Responsibility’s forecasts are that Jeremy Hunt has only £12.5b of room for tax cuts or spending increases, an insufficient amount to provide for a 2p cut in National Insurance or income tax (or 1p off both). It’s considerably less than others have indicated in terms of headroom, but the Chancellor has been cautious in previous Budgets/updates because of the 2022 episode that caused major market disruption. I think he may continue to be cautious with spending plans and tax cuts, which will limit any significant market moves, in my opinion.

Compare and contrast that with Euroland, where this week has already seen the release of the March Sentix investor confidence index. Later in the week we have German factory orders and industrial production data for December. The Sentix reading came in broadly in line with expectations, recording a small improvement in confidence. However, that contrasts with some of the recent data releases that have recorded a worsening in activity and additional signs of deflation. 

That’s why the German industrial production data is likely to prove critical, as it’ll demonstrate how much of last month’s massive bounce in orders was a one-off. I realise there is also the matter of the ECB (European Central Bank) Governing Council meeting and monetary policy decision this week (Thursday). There could be some interesting messages coming out of the press conference, but I still think it is too soon for the ECB to have materially switched to any imminent interest rate cuts. As such, the EUR still looks vulnerable to me, despite how markets are currently trading, but not from the ECB decision per se. 

Meanwhile in the US, outside of stopgap measures to prevent a government shutdown, the US administration still has a funding problem when it comes to current spending plans and the US debt ceiling that could rumble on into the summer. This could have an adverse effect on the US President’s approval ratings heading into the November election. This week also sees the Super Tuesday primary races that could see former President Trump take one step closer to being the Republican nominee. 

There is also the Federal Reserve’s latest update for macroeconomic assessment, the Beige Book, released on Wednesday night, and finally the February employment report on Friday. The mixed signals being exhibited from the US would suggest that all is not well, and that’s before we get into the issues around the latest US regional bank to find itself in trouble, after last year’s banking failures.

Outside of the ECB decision, this week sees important central banking meetings in Eastern Europe, North America and Latin America. The NBP (National Bank of Poland) is set to leave interest rates on hold this week, but are those comprising the MPC (Monetary Policy Committee) becoming more split about the need for further rate cuts? The NBP’s Governor, Glapinski, has had his view, that the MPC would have a majority for further rate cuts this year, challenged recently. 

In Canada, the Bank of Canada is also expected to do nothing, but is the economy’s weaker performance tipping the scales in favour of a cut earlier than the Federal Reserve, and could that cause some CAD weakness? 

Finally, in Peru, a 25-basis point rate cut could be sanctioned (in line with the cuts sanctioned since September 2023). The risks are that the Peruvian central bank could step up the monetary loosening because inflation is undershooting expectations. However, I think it will remain comfortable with the pace of cuts, unless there is a macroeconomic or market surprise in the region or more locally.