Pound Retreats from One-Month High, Euro Buoyed by Hawkish ECB Signals

  • Pound slumps as UK private sectors contracts more than forecast.

  • US Dollar falls as Fed signals 25bps interest rate hikes at future meetings.

  • Euro boosted by hawkish signals from ECB policymakers.

  • US GDP in the Spotlight

GBP/EUR Exchange Rate: Pound Slips as Recession Forecast Worsen

The Pound Euro (GBP/EUR) exchange rate struck a one-month high in the second half of last week. Persistent market bets on a 50bps interest rate hike from the Bank of England (BoE) helped to underpin Sterling.

However the Pound struggled to maintain this upward momentum at the start of the week. Forecasts that the UK’s recession would be worse than previously forecast started to apply pressure to GBP exchange rates.

The Sterling selloff then accelerated on Tuesday after the UK’s latest PMI figures. January’s index reported a sharp downturn in the UK’s dominant services sector, which saw growth in the private sector slump to a two-month low.

Looking to the next seven days, the prospect of further public sector strikes could keep pressure on the Pound. Downbeat forecasts for the UK’s economy could also dent confidence in Sterling.

GBP/USD Exchange Rate: Sterling Retreats from Seven-Month High

Trade in the Pound US Dollar (GBP/USD) exchange rate was volatile over the past seven days. The pairing climbed to a seven-month high before ultimately falling on the back of disappointing UK data release.

The Pound initially found support from stubbornly high core inflation on Wednesday. Whilst headline inflation eased, the data bolstered BoE rate hike bets and Sterling in turn.

A surprise slump in December’s retail sales saw Sterling briefly shed some of its gains on Friday. A prevailing risk-on mood helped the GBP/USD exchange rate close the week on a positive note.

The UK’s poor PMI releases, coupled with profit taking and concerns over domestic industrial action then saw the Pound come under heavy selling pressure in the first half of this week.

Turning to the week to come, the latest distributive trades data could pull the Pound lower if it slips as forecast on Thursday. The measure of health in the retail sector could add to the UK’s poor outlook.

USD/GBP Exchange Rate: US Dollar Falls as Fed Softens Rate Hike Stance

The US Dollar Pound (USD/GBP) edged lower over the past seven days. A larger-than-expected fall in US retail sales infused volatility into the ‘Greenback’ on Wednesday.

An initial response pulled USD lower, before recession fears spooked investors, bolstering safe-haven demand and propelling the US Dollar higher.

Speeches from Fed policymakers then placed the US Dollar back on the defensive. Multiple board members advocated a slower pace of policy tightening from the central bank.

An upbeat market mood prompted further losses in the US Dollar. The latest PMIs on Tuesday helped USD to regain some lost ground as growth in the US private sector fell by less than forecast, which helped buoy the currency.

Looking ahead, a forecast slowdown in fourth quarter GDP growth could weigh on USD and add to recession fears on Thursday. At the same time a forecast uptick in the core PCE price index could bolster bets on further Fed rate hikes. Finally, the Fed’s interest rate decision on Wednesday could push USD lower if they confirm plans to slow the pace of monetary tightening.

EUR/USD Exchange Rate: Euro Bolstered by Hawkish ECB Rhetoric

The Euro US Dollar (EUR/USD) exchange rate climbed over the past seven days. The Euro initially traded narrowly amid mixed messages from the European Central Bank (ECB). Eurozone CPI cooled sharply on Wednesday, but the impact of the data was mitigated by hawkish comments from ECB policymaker Francois Villeroy de Galhau.

Hawkish comments from other ECB board members boosted EUR over the course of the week. Multiple policymakers advocated a protracted and aggressive schedule of policy tightening compared to other central banks.

Tuesday’s PMI figures for the Eurozone provided a further boost to the Euro. The trading bloc’s services sector return to growth for the first time in six months. The data helped to alleviate Eurozone recession fears.

A slump in Eurozone fourth quarter GDP growth on Tuesday could weigh on EUR. Data showing another cool down in Eurozone inflation could also pull the Euro lower if it prompts a pullback in ECB rate hike bets.

Gareth Monk

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