Pound (GBP) Tumbles as Central Bank Inspires Bearish Trading
GBP/EUR: Down from €1.16 to €1.14
GBP/USD: Down from $1.22 to $1.21
The Pound (GBP) struggled to climb at the beginning of the week as tailwinds resulting from a higher-than-expected GDP release were undermined by bleak economic forecasts.
October’s jobs report was published on Tuesday, triggering a further downside in Sterling exchange rates as UK unemployment increased. Nevertheless, significant losses were capped by a rise in average earnings.
Midweek, UK inflation softened by more than expected, complicating interest rate expectations for the Bank of England (BoE). GBP ticked up slightly on hopes that price pressure may begin to ease.
Subsequently, Sterling crashed on Thursday as the Bank of England decided to hike interest rates by 50bps. While the hike was expected, the bank’s commentary was relatively dovish compared with that of the European Central Bank (ECB), which had its rate decision on the same day.
At the end of the week, the Pound trended modestly higher but was unable to regain Thursday’s losses. Improving GBP sentiment was undermined by a fall in UK retail sales for the month of November.
Euro (EUR) Bolstered by ECB Comments
EUR/GBP: Up from £0.85 to £0.87
EUR/USD: Unchanged at $1.05
The Euro (EUR) enjoyed a boost at the start of the week as bearish market sentiment buoyed the single currency against its riskier peers. Weakness in the US Dollar (USD) also lent support to EUR due to the currencies’ strong negative correlation.
The Euro came under renewed pressure on Tuesday, trading sideways despite positive German sentiment data. Dampening the currency’s appeal may have been the rising price of natural gas, reviving fears about energy security in the bloc.
Midweek, industrial production printed at -2% for the month of October, compared to an expected -1.5%. EUR continued remained subdued, supported somewhat by ongoing Dollar weakness.
A hawkish European Central Bank (ECB) came to the rescue on Thursday and bucked up Euro exchange rates: the central bank raised its interest rates to 2.5% with a 50bps hike. ECB President Christine Lagarde hinted at two further 50bps rate hikes ahead in a hawkish move.
On Friday, better-than-expected PMI results further bolstered the single currency. Both services and manufacturing activity exceeded forecasts despite remaining in contraction territory, leading EUR exchange rates to close the week higher than they began.
US Dollar (USD) Recovers Losses on Hawkish Fedspeak
USD/GBP: Down from £0.85 to £0.82
USD/EUR: Unchanged at €0.94
The US Dollar (USD) wavered against its peers last week, as US inflation and an interest rate decision from the Federal Reserve featured in the weekly docket.
The ‘Greenback’ was muted at the beginning of the week as the Fed remained in its blackout period and economic data was scarce. On Tuesday, USD exchange rates shot lower on a weaker-than-expected inflation reading.
Midweek, US Dollar losses were extended as analysts considered that inflation had hit a peak and begun to cool. In the European evening, however, the ‘Greenback’ regained lost ground after the Fed unveiled its latest interest rate decision
Fed Chairman Jerome Powell signalled that further interest rate hikes were likely and that the terminal rate would be higher than initially expected. This prompted bullish flows which further strengthened the currency.
On Thursday, USD experienced a brief dip as retail data disappointed alongside industrial production: this was quickly recovered however, as risk-averse trading conditions drew support to the safe-haven ‘Greenback’. At the end of the week, the latest private sector PMIs disappointed likewise, but USD losses were minimal.