US Dollar (USD) Trends Lower on Disappointing Inflation Release
USD/GBP: Down from £0.82 to £0.81
USD/EUR: Down from €0.93 to €0.92
The US Dollar (USD) encountered multiple headwinds this past week, most notably a reduction in inflation which fuelled fears that the Federal Reserve would slow its monetary policy tightening regime.
Earlier in the week, the ‘Greenback’ got off to a bad start as a risk-on market mood depleted support for the safe-haven asset. Hawkish comments from the Fed’s Raphael Bostic were unable to buoy USD despite his comments in favour of keeping interest rates above 5% for ‘a long time’.
An uninspiring speech from Fed chairman Jerome Powell on Tuesday left the US Dollar exposed to losses, while a fall in economic optimism subdued morale further.
Midweek, investors were reluctant to place hawkish bets ahead of the latest inflation reading, anticipating a fall from 7.1% in November to 6.5% last month. A modest fall in US Treasury bond yields helped to cap optimism.
On Thursday, inflation printed as expected – triggering a USD selloff as markets scaled back interest rate hike bets. The ‘Greenback’ managed to recoup some of its losses on Friday, although traders remained relatively bearish as Philadelphia Fed President Patrick Harker said:
‘I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75 basis points at a time have surely passed.’
Pound (GBP) Weakens Overall as Forecasts are Downbeat
GBP/EUR: Down from €1.13 to €1.12
GBP/USD: Up from $1.21 to $1.22
The Pound (GBP) traded variably against its peers last week as domestic economic concerns dampened Sterling sentiment.
On Monday, a risk-on mood prompted some gains in GBP exchange rates, but the news of an end to energy support measures for UK businesses countered tailwinds. UK Chancellor Jeremy Hunt confirmed that current levels of support would cease in April.
On Tuesday, a greater-than-expected increase in December’s retail sales monitor was likewise unable to inspire a significant uptrend. Further clashes between unions and the government in negotiating working conditions derailed support for the Pound as Rishi Sunak’s party pushed for anti-strike legislation.
Midweek, morale remained downbeat as industry leaders warned that a cut to energy support measures would force many UK businesses to close.
Ahead of Friday’s GDP release, the Pound extended its downtrend against several of its rivals. Economists fear the Bank of England (BoE) UK will ease off monetary policy tightening as a combined result of falling inflation and contraction in the UK’s economy.
At the end of the week, however, the UK economy was revealed to have expanded rather than contracting as expected. Sterling enjoyed a modest boost as analysts reasoned that increased alcohol sales around the time of the World Cup had helped boost GDP.
Euro (EUR) Climbs on Hawkish ECB Comments
EUR/GBP: Unchanged at £0.88
EUR/USD: Up from $1.07 to $1.08
The Euro (EUR) firmed through last week’s session, inspired by low unemployment and a hawkish European Central Bank (ECB); on Friday, however, weak economic data from Germany capped further gains.
At the beginning of the week the single currency benefitted from the Euro area’s latest unemployment data, which remained at the record low of 6.5% in the month of November.
The following day, ECB Governing Council member Isabel Schnabel remarked that ‘interest rates will still have to rise significantly at a steady pace’, bolstering hopes for further rate hikes in the near term.
Midweek, Schnabel’s comments were reinforced by hawkish rhetoric from Olli Rehn and François Villeroy de Galhau, who added the ECB must continue to hike at a ‘pragmatic pace’ over the coming months.
Thursday’s US inflation release buoyed the Euro further still, as the likelihood of reduced monetary policy tightening from the Federal Reserve may give Europe’s central bank a chance to catch up.
Friday saw the Euro touch a 15-week high against the Pound and an eight-month high against the US Dollar (USD), after which the currency came under pressure. Germany’s 2022 GDP report showed a significant slowdown in growth from 2021, indicating a weakening economy in the bloc.