The Previous Week: US Dollar Tumbles on Dovish Fedspeak, Pound Gains Capped by Inflation

Pound (GBP) Trends Broadly Higher, Living Costs Cap Gains

GBP/EUR: Up from €1.15 to €1.16
GBP/USD: Up from $1.18 to $1.20

The Pound (GBP) trended broadly higher against its peers through last week’s trading session, although gains were capped as inflationary pressures persisted and strikes threatened economic disruption.

A lack of significant data subdued Sterling exchange rates at the beginning of the week; on Tuesday, GBP trading continued directionless. The UK’s latest public sector borrowing figures came in lower than expected but the Pound remained pressured by economic uncertainty.

Midweek, PMI data printed above expectations, lending support to Sterling exchange rates. Also bolstering the Pound were a sustained risk-on mood and hawkish comments from the Bank of England (BoE).

Policymaker Catherine Mann told reporters that while price and wage dynamics in the UK are not consistent with the 2% inflation target, the central bank was not observing a wage-price spiral.

At the end of the week, the Pound experienced some volatility amid expectations of unimpressive Black Friday sales. Experts warned that consumers are set to slash spending; furthermore, postal strikes are set to disrupt the holiday season.

Euro (EUR) Struggles on Dovish ECB Minutes

EUR/GBP: Down from £0.86 to £0.85
EUR/USD: Up from $1.02 to $1.03

The Euro (EUR) began the week well, shrugging off an unexpected decline in German producer price inflation. Nevertheless, the single currency struggled on Tuesday after Russia’s Gazprom threatened to cut gas supplies to Europe via Ukraine.

In the second half of Tuesday’s session, EUR regained some ground after Eurozone consumer confidence beat forecasts, but a sharp risk-on rally midweek saw the comparatively safe-haven currency tumble against its peers.

Losses were compounded on Thursday despite a better-than-expected improvement in German business morale. The European Central Bank (ECB)’s latest meeting minutes expressed concern about a potential Eurozone recession, warning that inflation may be getting entrenched.

At the end of the week, mixed German data caused fluctuation in Euro exchange rates. Consumer confidence in Europe’s economy improved by less than expected, but Germany’s finalised Q3 GDP reading was revised marginally higher.

The data fuelled hopes that the coming recession will not hit as hard as initially feared, data showed on Friday. Economist Thomas Gitzel remarked:

‘It’s by no means a foregone conclusion that the third quarter’s GDP growth marks the end of positive growth rates for the time being.’

US Dollar (USD) Dented by Risk-On Trading Sentiment

USD/GBP: Down from £0.84 to £0.82
USD/EUR: Down from to €0.97 to €0.96

The US Dollar (USD) sank against the majority of its peers last week, as a risk-positive mood weakened appeal for the safe-haven currency. Moreover, a shock contraction in manufacturing activity pressured the ‘Greenback’ further.

Investors began to pare back interest rate hike bets from the Federal Reserve Bank as the US economy showed signs of slowing. On Wednesday, an unexpected rise in jobless claims compounded investor concerns.

Furthermore, The United States’ manufacturing PMI printed at a 30-month low, while the services index hit a three-month low. The data added to speculation that the Fed would begin to slow interest rate hikes on account of cooling inflation: a notion that was strengthened by the release of the Federal Open Market Committee (FOMC) meeting minutes.

A risk-off market mood during Friday’s European session helped the ‘Greenback’ recover some of its losses. Surging Covid-19 infections in China inspired fears of further supply chain woes as 32,695 daily cases were recorded.

Olivia Evershed

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