The British pound faces a tough week, with the Bank of England meeting and Scottish elections due. US dollar traders have an eye on the NFP data to be released this Friday.
Despite being a short week owing to the May Day holiday on Monday, a number of important economic events are taking place. As this is the first week of the trading month, the focus in the US is on Friday’s Non-Farm Payrolls (NFP) data. In Europe attention will be on the United Kingdom, as the Bank of England announces its monetary policy decision on Thursday.
Further afield, the Reserve Bank of Australia announced today that it will maintain its cash rate at the lower boundary (0.1%) and continue the parameters of the Term Funding Facility.
Twin Event Risk for the British Pound
The dollar traded weakly for the entire month of April, gaining only some ground in the last trading day of the month. Whether that was profit-taking for the month or the start of a reversal remains to be seen.
This week is pivotal for the quarter and, perhaps, for the rest of the year. With vaccination efforts picking up speed throughout the world, market participants are focussing on the bigger picture, as are the central banks.
The United Kingdom faces its most important test since the Brexit divorce last December. A twin event risk for the pound is in the makings, as the Bank of England will likely suggest the tapering of its asset purchases. There are also the Scottish elections results to consider. Even if the Bank of England does not signal a tapering, its indications are likely to be mixed given the upbeat economic forecasts. The chance of another Scottish independence vote may also weigh on the pound, which struggled ahead of the 1.40 level and now trades with a bearish tone.
The NFP numbers to be released this Friday are expected to show close to a million new jobs to have been added in March, according to market analysts, but there is also a strong possibility that the US economy did even better. Moreover, the unemployment rate is expected to decline to 5.7%.
All in all, May started slow, but the market’s volatility is expected to increase gradually as we approach the end of the trading week. Positioning for the quarter begins today.