Pound firms on hopes stimulus package will help UK avoid recession

Philip McHugh May 30th 2022 - 2 minute read

The Pound ticked higher on Friday, amidst hopes a new fiscal stimulus package will help the UK swerve a recession this year.

Sterling opens this week mostly subdued, with GBP/EUR muted at €1.1744 and GBP/USD flat at $1.2630. GBP/CAD is rangebound at C$1.6036, while GBP/AUD and GBP/NZD hold steady at AU$1.7599 and NZ$1.9304, respectively.

Looking ahead, will an acceleration of German inflation help to bolster the euro at the start of this week’s session?

What’s been happening?

The pound traded with modest gains against both the euro and US dollar at the end of last week.

This came amid optimism over Chancellor Rishi Sunak’s recently announced cost of living support package.

Sterling firmed as analysts suggested the fiscal stimulus should help the UK narrowly avoid a recession this year, while also paving the way for the Bank of England (BoE) to continue raising interest rates.

The euro, meanwhile, was subdued on Friday amid renewed concerns over European energy security as the EU pushed forward with plans to ban Russian oil imports following a concession to Hungary to exclude pipeline flows.

Finally, the US dollar was place on the defensive amidst a drop in US Treasury yields and prevailing risk-on mood.

These losses were then reinforced by the publication of Aprils core PCE price index. A fall in the Federal Reserve’s preferred indicator for inflation fuelled suggestions the Fed might look to pause its tightening cycle later in the year.

What’s coming up?

The start of this week will likely see the focus on the publication of Germany’s consumer price index.

May’s preliminary CPI release is expected to report German inflation accelerated, potentially lifting the euro as this would support the European Central Bank (ECB) raising interest rates in July.

The single currency may stumble in the meantime however with the release of the Eurozone’s latest economic sentiment index. Another fall in investor morale this month could act as a headwind for the euro this morning.

The absence of any notable UK data may see the direction of the pound driven by domestic developments today. Will ongoing Brexit uncertainty leave Sterling to trade on the back foot?

Meanwhile, the closure of US markets for the extended Memorial Day weekend could result in thin trading conditions in the US dollar at the start of this week.

Written by
Philip McHugh

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