Critical economic data such as inflation, jobs, and retail sales are due in the UK. These numbers will play a decisive role in the Bank of England's rate decision next month. Currently, the market is anticipating a 75% chance of a further hike to 4.50%, which is expected to be the highest point.

This week, UK economic data has been mixed, with monthly growth remaining stagnant while construction and manufacturing surpassing expectations. According to the IMF, the UK economy is projected to shrink by 0.3% this year and rank among the worst-performing G7 economies in 2024.

In the US, inflation decreased to a lower-than-anticipated 5%, marking its lowest level in nearly two years. However, an increase in 'core' inflation will put pressure on the Fed, which is expected to raise rates for the last time in May. With the possibility of a mild recession, markets are pricing in rate cuts later this year, which is negatively affecting the dollar's sentiment.

The European Central Bank remains the most cautious with further rate hikes expected in the coming months due to the challenging inflationary outlook.

In the exchanges, sterling is trading near a yearly high against the dollar at 1.2500, but has weakened against the euro at 1.1300 due to the expected variance in interest rate differentials.

Over recent weeks, the Pound has gained ground against the Australian Dollar, climbing into the upper half of an eight-year trading range. Analysts predict that the exchange rate could rise further in the coming weeks, potentially approaching 1.90, and may find support at around 1.8350, should the relative interest rate outlook remain favourable.

Although the Australian Dollar saw some gains against most major currencies midweek, it has underperformed among G10 and G20 currencies over the past month, contributing to a more than five percent rise in GBP/AUD for the year.

This recent uptick in GBP/AUD can be attributed to a supportive shift in bond yield differentials, with some reaching their highest levels since 2005 in recent months. Increases in the Bank of England's Bank Rate have also contributed to the rise in the GBP/AUD interest rate differential over the past year, with a relatively lesser increase in the Reserve Bank of Australia's cash rate playing a growing role as well.

The RBA's recent decision to leave its cash rate unchanged at 3.6% was a departure from its series of 10 increases that began in April 2022. Along with the Bank of Canada and Norges Bank of Norway, the RBA is one of only three in the G10 group to take a breather in efforts to bring down inflation.

Governor Lowe cited three reasons for the RBA's more cautious approach, including lower wage growth rates in Australia compared to elsewhere and a higher share of variable rate mortgages, which makes the RBA's cash rate a more significant influence on the Australian economy than in some other central banks and economies.

Despite these factors, the GBP/AUD interest rate differential could remain favourable in the near future, especially given the UK economy's recent outperformance of a pessimistic market consensus. This, along with the supportive bond yield differentials, may lead Sterling to new highs in the coming weeks or months.

Looking ahead, analysts predict that GBP/AUD will likely trade within a rough range of 1.8350 to 1.8950.

GBP/USD dipped after the US jobs data on Friday and tested support below the 1.2400 level before settling just above this level on Monday.  The US employment report recorded an increase in non-farm payrolls of 236,000 for March and close to market expectations while the February increase was revised higher to 326,000 from the original reading of 311,000.  There was another strong increase in the number of government jobs of close to 50,000 and the increase in private payrolls was below expectations.  Market analysts are once again focused on a potential recession in the United States, following aggressive monetary tightening from the Federal Reserve (Fed) and the banking crisis that started last month.

The EUR’s drift last week extended a bit more than I expected but support has developed around the upper 1.08 zone, with investors buying into improved Eurozone growth prospects and the notion that the hawkish-sounding ECB is likely to raise rates a bit more still and—perhaps more importantly—keep policy relatively tight in the months ahead.

GBP has seen a steady improvement in the past few weeks, recovery from last year’s politically driven weakness has been quite impressive and further upside gains are looking possible. Modestly tighter BoE policy remains a strong possibility in May but is only partially factored in at this point.  GBP may find firmer directional strength on Thursday when the UK will release updates on the Gross Domestic Product, Industrial and Manufacturing Production, and the Trade Balance.

Financial markets returned to some relative calm this week following the recent turbulence and central bank rate rises. However, uncertainty remains high and fixed-income markets continue to be volatile on the uncertain interest rate outlook.

Analysts anticipate one more rate hike from the Bank of England, potentially reaching a peak of 4.50%, subject to the inflation and job data in the upcoming months. In the US, there is a mixed perspective on whether rates have reached their peak or if there will be an additional hike in May. Rate cuts are being projected for later in the year as the focus shifts from inflation to growth. Meanwhile, the European Central Bank remains the most hawkish and will likely continue to hike rates in the following months, prioritizing the reduction of persistently high inflation.

Global geopolitical tensions continue to be a cause for concern, impacting market sentiment, although equity markets have stabilized recently.

Looking ahead, the upcoming week is expected to be relatively quiet due to the Easter Bank Holiday weekend. The UK calendar begins with Manufacturing PMI on Monday, followed by the crucial Services PMI on Wednesday. We anticipate that both indicators will remain unchanged, with the manufacturing sector continuing to contract, while the services sector remains relatively stable. The highlight of the week in the US is Non-Farm payrolls, with a slight decline from 311k to 238k anticipated for February.

On the exchanges, volatility remains high with a real lack of conviction or trend on the hugely uncertain outlook. GBP/USD remains near its recent highs above 1.2300 whilst GBP/EUR has drifted lower from the recent highs at 1.1400.