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Week Ahead: Sterling to sink to greater depths?

Week Ahead: Sterling to sink to greater depths?

The market adage “Sell in May and go away” has certainly rung true in 2022.

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.

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

 

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.

 

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.

 

READ MORE: Dovish BOE sends GBPUSD to lowest since mid-2020

 

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