Pound (GBP) Trades Mixed as Downbeat Forecasts Sap Support
GBP/EUR: Unchanged at €1.16
GBP/USD: Up from $1.21 to $1.22
At the beginning of the week, Pound (GBP) sentiment was subdued by an underwhelming finalised services PMI. Additionally, bleak domestic headlines sapped support as the Confederation of British Industry (CBI) said the UK’s recession could last until Q4 2023.
Sterling firmed slightly on Tuesday as the British Retail Consortium (BRC)’s latest release printed above expectations; midweek, however, GBP exchange rates were dented by a fall in UK house prices.
News of a UK-US gas deal lent some support to the currency, as US President Joe Biden agreed to ramp up gas exports to the UK. Nevertheless, the Pound tumbled on Thursday as concern mounted over the health of UK businesses.
The trade body UKHospitality said it expected scheduled rail strikes to cost businesses about £1.5bn in lost sales over winter.
On Friday, the Pound was supported by positive interest rate expectations as another 50 basis-point increase from the Bank of England (BoE) was deemed likely. On the other hand, a package of more than 30 UK financial reforms inspired some dovishness.
Euro (EUR) Bolstered by ECB Comments
EUR/GBP: Down from £0.86 to £0.85
EUR/USD: Up from $1.04 to $1.05
The Euro (EUR) firmed over the past week, despite an initial drop amid downbeat data releases.
Retail sales in the Eurozone slumped in October, while November’s finalised services PMI confirmed a contraction in the sector. Andrew Kenningham at Capital Economics commented:
‘With households facing huge energy bills and rising interest rates, we expect spending to fall further over the winter.’
Hawkish comments from ECB board members helped the single currency to recover subsequently, as policymakers Gabriel Makhlouf and Francois Villeroy de Galhau signalled their support for a 50bps interest rate hike.
Wednesday’s GDP data also buoyed the single currency, as the trading bloc’s economy grew by more than forecast. Meanwhile, German industrial production fell by less than forecast.
At the end of the week, the Euro pared back some of its gains on account of a mixed risk appetite and stronger US Dollar. Economists cautioned that the worsening economic backdrop has brought many central bankers closer to the moment of slowing tightening efforts.
US Dollar (USD) Dented by Fed Uncertainty
USD/GBP: Down from £0.82 to £0.81
USD/EUR: Down from to €0.95 to €0.94
The US Dollar (USD) enjoyed an uptick at the beginning of the week as the ISM non-manufacturing PMI exceeded forecasts. An improvement in service sector activity and factory orders also helped to support the ‘Greenback’.
Initially, investors were compelled to increase rate hike bets, but with the Federal Reserve on a blackout ahead of next week’s interest rate decision, data-inspired optimism was limited.
Subsequently, the US Dollar traded on risk sentiment, exposed to frequent losses as market mood changed day by day. A larger-than-expected fall in China’s trade surplus midweek supported USD somewhat, as investors turned to the safe-haven currency.
At the end of the week, the US Dollar was largely muted. The latest annualised PPI readings printed above forecasts but showed a fall on October’s data: as such, investors remained cautious ahead of next week’s interest rate decision.