Pound (GBP) Trends Broadly Higher despite Recession Fears
GBP/EUR: Up from €1.12 to €1.14
GBP/USD: Up from $1.22 to $1.23
The Pound (GBP) firmed over the course of last week, as persistently high UK inflation increased bets for hawkish interest rate hikes ahead.
On Monday, a lack of significant UK data capped Sterling gains, alongside recession fears. The World Economic Forum (WEF) in Davos began, marking the first meeting since the pandemic for many attendees.
On Tuesday, GBP enjoyed a slight uptick as UK wage growth printed above expectations, increasing pressure upon the Bank of England (BoE) to extend its monetary policy tightening schedule.
Midweek, Sterling climbed higher as core consumer price data exceeded expectations. The release suggests that inflationary pressures in the UK remain persistent and strengthens the case for additional interest rate hikes.
A risk-off market mood pressured the Pound on Thursday, but the currency avoided significant losses as markets bet on a 50bps increase at the BoE’s February meeting. At the end of the week, the Pound retreated against several of its peers as UK retail sales were revealed to have declined in December.
US Dollar (USD) Strengthened by Fall in Jobless Claims
USD/GBP: Down from £0.81 to £0.80
USD/EUR: Unchanged at €0.92
The US Dollar (USD) fluctuated last week but was supported in part by falling 4-week jobless claims.
A national holiday for Martin Luther King Day in the United States limited market movement on Monday, although an uptick in US Treasury bond yields lent the ‘Greenback’ some support.
Subsequently, mixed messages regarding the Federal Reserve’s stance on monetary policy caused investor uncertainty. Philadelphia Fed President Patrick Harker struck a relatively dovish tone, while St Louis Fed President James Bullard reiterated his desire for further interest rate hikes.
On Thursday, USD enjoyed a boost from better-than-expected jobs data: a fall in jobless claims to 206K pointed to continuing tightness in the labour market. As this is a core factor in inflation, rate hike bets increased.
At the end of the week, a risk-on market mood capped further gains for the US Dollar, given the currency’s safe-haven status.
Euro (EUR) Gains Capped by Mixed ECB Signals
EUR/GBP: Down from £0.88 to £0.87
EUR/USD: Unchanged at $1.08
The Euro (EUR) wavered last week as mixed messaging from the European Central Bank (ECB) confused investors.
A larger-than-forecast slump in German wholesale prices tempered rate hike bets on Monday; on Tuesday, further evidence of cooling inflation deterred investors somewhat.
Losses were capped by upbeat comments from the ECB as well as German economic sentiment unexpectedly improving far above expectations. The ZEW index rose into positive territory for the first time since the Ukraine conflict started in February 2022.
Midweek, policymaker Francois Villeroy de Galhau reassured investors by claiming the central bank will continue with its course of 50bps rate hikes, although his comments contrasted with reports from Bloomberg earlier in the week. The media outlet suggested the European Central Bank may slow its pace of policy tightening.
Nevertheless, ECB Governing Council member Klaas Knot said that the bank planned multiple 50bps hikes ahead while President Christine Lagarde told delegates at the World Economic Forum on Thursday that the bank was committed to ‘staying the course’ with rate hikes.