Euro (EUR) Weakens Following ECB Rate Hike
EUR/GBP: Down from £0.87 to £0.85
EUR/USD: Up from $0.98 to $0.99
The Euro (EUR) traded in a mixed range against its peers last week as domestic data alternately impressed and disappointed. The main trading stimulus was Thursday’s interest rate decision from the European Central Bank (ECB), which disappointed despite a 75bps hike.
On Monday, the single currency was buoyed as PMI data printed mixed. Service-sector activity across the bloc remained subdued but didn’t worsen on September’s release; on the other hand, manufacturing activity contracted further.
The following day, Germany’s IFO business climate indicator printed above expectations but fell on the previous release, pressuring the Euro. The index highlighted the challenges presented by rising inflation and its impact upon growth.
Midweek, EUR was shored up by weakness in the US Dollar (USD) but the currency fell once more on Thursday due to the ECB’s rate decision. The drop in Euro exchange rates was thought to have been caused by speculation that the central bank would soon slow its pace of policy tightening.
At the end of the week, the single currency found some support on news that Germany’s economy had expanded in the third quarter, against expectations. Gains were limited, however, and EUR subsequently weakened against several peers.
Pound Buoyed by Appointment of Rishi Sunak as PM
GBP/EUR: Up from €1.14 to €1.16
GBP/USD: Up from $1.13 to $1.16
The Pound (GBP) trended broadly higher against its peers last week: Rishi Sunak’s appointment as UK Prime Minister boosted GBP sentiment overall although the prospect of further fiscal uncertainty capped gains.
On Monday, the likelihood of Sunak’s success in the UK’s leadership contest supported GBP, but Sterling optimism was limited by disappointing flash PMI data. Both the UK’s services and manufacturing PMIs for October fell further into contraction territory.
On Tuesday, confirmation that Rishi Sunak was the new Prime Minister helped the currency climb further, as markets anticipated that the new PM would restore political and fiscal credibility.
GBP optimism was sustained midweek, despite news the UK’s fiscal policy announcement would be delayed until mid-November. Ben Zanako at the Institute for Fiscal Studies (IFS) explained:
‘A delay is sensible. There’s a lot riding on this, so important to get the details right.’
Sterling weakened slightly on Thursday as economic jitters were rekindled: the delay of the fiscal announcement triggered uncertainty regarding the Bank of England (BoE)’s likely policy move next week.
On Friday, markets increased bets for a below-forecast interest rate hike on Wednesday, but the Pound nevertheless managed to rise against the majority of its peers. Downbeat market sentiment may have lent the currency some support against its risk-sensitive exchange partners while ongoing political optimism capped losses.
US Dollar (USD) Tumbles as Data Releases Disappoint
USD/GBP: Down from £0.88 to £0.86
USD/EUR: Down from €1.01 to €1.00
The US Dollar slipped over the past week as several downbeat data releases sapped support for the currency. On Monday, poor PMI figures pressured the ‘Greenback’, as output across the US private sector fell by more than expected.
On Tuesday, consumer confidence hit a three-month low for the month of October. The release compounded losses triggered by reports that the Federal Reserve may soon be looking to slow its pace of policy tightening.
Thursday’s above-forecast third quarter expansion in the US economy helped the US Dollar recover some of its losses: a rise in net trade provided the boost to the economy and US Treasury yields rose accordingly.
Paul Ashworth, chief North America economist at Capital Economics, observed: ‘Overall, the 2.6% rebound in the third quarter more than reversed the decline in the first half of the year.’
Subsequently, Friday’s core PCE price index release – the Fed’s preferred measure of inflation – climbed to 5.1% for September, helping boost USD further still. An increase in inflation increases the likelihood that the US central bank will continue on its path of monetary policy tightening.