Pound Climbs after Strong Wage Growth Figures, US Dollar Tumbles as Inflation Cools in December

  • Pound climbs as strong wage growth intensifies BoE rate hike bets.

  • US Dollar tumbles as cooler inflation eases Fed speculation.

  • Euro fluctuates amid shifting ECB rate hike expectations.

  • Widespread strikes continue to plague UK public sector.

GBP/EUR Exchange Rate: Widespread Strikes Keep Pound in Narrow Range

The Pound Euro (GBP/EUR) exchange rate traded within a limited range over much of the past week, before making strong gains on Tuesday. The Pound initially came under pressure from intensifying industrial action, with further strikes set to come from health and rail sector workers.

Sterling found some support from positive profit reports from the retail sector, however. Comments alongside the reports added to the UK’s gloomy outlook however, with sector heads warning of a difficult 2023.

The Pound then leaped on Tuesday supported by strong UK wages figures and a broadly upbeat market mood.

Looking ahead, the prospect of more widespread industrial action could dampen enthusiasm for the Pound, amid the threat of major disruption to the UK economy in February.

GBP/USD Exchange Rate: Sterling Bolstered by Above-Forecast Wage Growth

The Pound US Dollar (GBP/USD) exchange rate rose steadily over the past week. GBP initially struggled to make headway as markets pared bets on further BoE interest rate hikes. A slowdown in US inflation increased speculation of easing price pressures, and capped the Pound’s gains.

Better-than-expected UK GDP figures on Friday then revived the Pound. The UK economy expanded by 0.1% in November versus an expected contraction of 0.2%. The data stoked hopes the UK may have avoided slipping into a recession at the end of 2022.

Better-than-forecast wage growth figures on Tuesday also pushed Sterling to fresh highs. The data fuelled Bank of England (BoE) interest rate hike bets as markets expect the central bank to act to prevent a wage-price spiral.

This uptrend in the GBP/USD exchange rates was reinforced by the UK’s consumer price index. Inflation remained in double digits last month, further underpinning BoE rate hike expectations.

A forecast rebound in UK retail sales in December could boost the Pound later this week if Friday’s figures print as forecast. On the other hand, a downturn in January’s PMIs on Tuesday could pull Sterling lower.

USD/GBP Exchange Rate: USD Tumbles after Sharp Cooldown in December’s Inflation

The US Dollar Pound (USD/GBP) exchange rate tumbled over the past seven days. The latest US CPI release saw the US Dollar tumble on Thursday. December’s figures reported inflation fell to 6.5% its slowest pace since October 2021.

A cautious market mood amid global recession fears subsequently lent support to the safe-haven ‘Greenback’, however. Strengthening US Treasury bond yields also helped to limit any drastic losses for USD.

The latest reading of the NY Empire State Manufacturing Index applied fresh pressure to the US Dollar on Tuesday. The index plunged to its worst levels since May 2020 adding to fears of a deep US recession.

Looking ahead, a forecast slip in December’s PPI and retail sales could deepen USD’s losses today. While a negative reading in next week’s PMIs could stoke recession fears and limit demand for the US Dollar.

EUR/USD Exchange Rate: Euro Sees Volatile Movements amid Mixed ECB Signals

The Euro US Dollar (EUR/USD) exchange rate trended higher over the past week. EUR found support from a hawkish rhetoric from the European Central Bank (ECB).

A slowdown in German GDP growth pulled EUR lower on Friday. Germany’s economy grew by a less-than-forecast 1.9%, with the war in Ukraine and higher energy costs weighed on the country’s growth.

The Euro managed to regain some lost ground on Tuesday after the latest reading of Germany’s economic sentiment index. The index printed in positive territory for the first time since February 2022.

However, the Euro subsequently plunged in the wake of a report from Bloomberg suggesting the ECB might slow the pace of future rate hikes, following a 50bps increase in February.

A forecast slip in German PPI on Friday could weigh on EUR. On the other hand, speeches from ECB President Christine Lagarde on Thursday and Friday could bolster the Euro if she pushing back against rumours of a dovish tilt.

Gareth Monk

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