Last week the pound was one of the top performing G10 currencies, as Donald Trump’s tweets and the dovish account of the March European Central Bank meeting led investors to buy it against both the dollar and euro. In fact, over the past three months sterling is up against all G10 currencies. Such moves have analysts questioning whether the pound’s status as a haven currency might be returning, and whether this could be the week that GBPUSD breaks the post-Brexit highs, set in January ‘18. On Friday the pound reached a 10 week high against the dollar and pulled itself out of a six month trading range against the euro, allowing GBPEUR to reach its highest level since May 2017. The move was helped by growing global geopolitical tensions, falling confidence in Trump’s agenda and increased market confidence that the UK and EU can strike a Brexit deal. 

The US, UK and France launched a series of air strikes in Syria in the early hours of Saturday, targeting three sites that are supposedly linked with the manufacture of the chemical weapons that the government is accused of using (most recently on the town of Douma). Western leaders have been keen to stress that the strikes aren’t aimed at bringing about a change in regime, with US Defence Secretary James Mattis commenting “right now this is a one-time shot” dependent on whether there is a repeat of the supposed use of chemical weapons, with UK Foreign Secretary Boris Johnson echoing that sentiment. Notably, Moscow was given advance warning of the strikes and so refrained from retaliatory measures such as shooting down the missiles as had been threatened. This has helped to prevent an escalation in the military conflict, with the US-Russia spat appearing to have been contained to more diplomatic measures. Washington is reportedly preparing further sanctions against Russia and Moscow is similarly preparing its own in response, with aerospace and nuclear industries reportedly being targeted.

Domestically, Prime Minister Theresa May is set to give a statement to the House of Commons today at 3:30pm which is expected to be followed by an emergency debate among MPs. Afterwards, the Labour party will be able to call a retrospective Commons vote on the strikes, if PM May does not pre-empty this and call for the vote herself beforehand. The Conservatives have issued orders for all their MPs to be present for a potential vote today. With concerns that the military action could escalate having been abated, markets have seen a relief rally. GBP crosses are relatively unchanged since this morning’s open with GBPUSD holding above 1.42 and GBPEUR at 1.1550.

On the political front, normality resumes today as UK MPs retake their seats in parliament. In terms of data, labour market figures (which are now released on Tuesdays) are expected to show a further firming in earnings growth, while CPI inflation (now published on Wednesdays) is expected to ease even more. While our forecasts indicate real wages (3m YoY) will have turned positive in February, we don’t expect this to have offset the impact of the snowfall on Thursday’s retail sales release. With the pound shifting from trading on political developments around Brexit to cyclical factors, strong data this week should boost the pound even further, as it is likely to increase the chances of the Bank of England raising interest rates at its May meeting, which is now just over two weeks away.