US Dollar (USD) Weakened by Faltering Rate Hike Expectations
USD/GBP: Down from £0.86 to £0.84
USD/EUR: Down from €0.99 to €0.96
The US Dollar (USD) slid to an 11-week low against the Pound this past week, as rate hike expectations weighed upon the currency alongside fluctuating risk sentiment.
At the beginning of the week, the ‘Greenback’ was pressured by USD investors reigning in their expectations for successive interest rate hikes from the Federal Reserve. Underwhelming employment data coupled with expectations of softening inflation reduced the likelihood of hawkish action.
Subsequently, USD exchange rates continued to falter as midterm elections loomed. The prospect of a political gridlock incited worries that fiscal policy decisions may be delayed.
At the end of the week, US inflation indeed printed with a larger-than-expected fall, which saw the odds of another 75bps rate hike from the Fed in December drop.
According to Samuel Fuller of Financial Markets Online, ‘Policymakers have got their wish. The signs are that a series of rapid interest rate rises may finally be taming rampant inflation. Prices are cooling faster than expected in the US, which makes a 0.75% rate rise next month extremely unlikely.’
Pound Strengthens on Political Tailwinds
GBP/EUR: Unchanged at €1.14
GBP/USD: Up from $1.15 to $1.18
The Pound (GBP) firmed against the majority of its peers this past week, buoyed by political optimism and a better-than-expected release from the British Retail Consortium (BRC).
On Monday, Sterling enjoyed some support as investors considered the currency oversold and sought to pick up a bargain. Tuesday’s BRC data revealed that sales in the year to October increased by more than expected, although resultant tailwinds were capped by global risk aversion.
Furthermore, dovish comments from the Bank of England (BoE)’s Huw Pill weighed upon GBP exchange rates.
Midweek, a lack of domestic data exposed the Pound to losses, but a significant downside was prevented as PM Rishi Sunak met with the President of the European Commission, Ursula von der Leyen, and the pair agreed to work together on the Northern Ireland protocol.
On Thursday, UK government bond prices rose and news that Sunak may be the first UK PM to meet with the Irish Prime Minister since 2007 lent further support to the Pound. On Friday, UK GDP contracted by less than expected, but Sterling came under pressure nevertheless as recession warnings were repeated.
Euro (EUR) Losses Capped by Negative Correlation to USD
EUR/GBP: Up from £0.86 to £0.87
EUR/USD: Up from $1.00 to $1.03
German industrial production figures printed above expectations at the beginning of the week, yet the Euro (EUR) wavered against its peers, succumbing to pressure as markets worried about Russia’s attacks on Ukrainian energy infrastructure.
On Tuesday, rising retail sales in the Eurozone lent some support to the single currency, although gains remained marginal. Capping losses for EUR was an upbeat speech from the European Central Bank’s Joachim Nagel.
Nagel told an audience in Frankfurt: ‘We must ensure that high inflation ends soon. I will therefore continue to do my utmost to ensure that we, the governing council of the ECB, don’t let up too early.’
Subsequently, the Eurozone’s economic bulletin applied pressure to Euro exchange rates, warning of multiple downside risks to the Eurozone economy. However, weakness in the shared currency was limited as the week wore on, by the US Dollar’s downslide.
On Friday, EUR regained some ground as ECB rate hike bets increased. German inflation encouraged such bets, printing its highest reading since December 1951 at 10.4%.