Pound (GBP) Weakens as Central Bank Turns Dovish
GBP/EUR: Down from €1.13 to €1.11
GBP/USD: Down from $1.23 $1.20
The Pound (GBP) fell against its peers this past week, as support was dampened by Bank of England (BoE) headwinds and industrial action across multiple industries.
On Monday, a risk-off mood subdued GBP optimism; on Tuesday, the BoE’s consumer credit report revealed a sharp slowdown in December. Markets consequently worried about the likelihood of a fall in UK GDP.
Midweek, January’s finalised manufacturing PMI printed at 47 rather than the 46.7 expected, capping losses for the currency. The currency was pressured, though by the economic implications of ‘the biggest strike day in a decade’.
Sterling ticked up briefly on Thursday as the BoE raised interest rates by 50bps as predicted; the Monetary Policy Committee (MPC) also remarked:
‘In the Committee’s central projection, GDP is projected to fall slightly throughout 2023 and 2024 Q1… But this is a much shallower profile for the decline in output than in the equivalent November Report projection.’
At the end of the week, however, the Pound relinquished its earlier gains on dovish comments from the BoE’s chief economist, who hinted that fewer, if any, further interest rate hikes would be necessary.
Euro (EUR) Strengthens, ECB Hikes by 50bps
EUR/GBP: Up from £0.87 to £0.89
EUR/USD: Down from $1.08 to $1.07
The Euro (EUR) climbed against its peers over the course of last week’s session, buoyed by upbeat data and rate hike optimism.
At the beginning of the week, economic sentiment in the bloc rose to 99.9 – above expectations – boosting the single currency. An unexpected increase in Q4 GDP extended EUR gains on Tuesday, despite a larger-than-forecast contraction in German retail sales.
On Wednesday, data showed that unemployment had increased in the bloc, while inflation waned as expected. Nevertheless, an uptick in core inflation capped Euro downside and exchange rates continued to rise.
The following day, the single currency experienced headwinds as the European Central Bank (ECB) was vague in its forward guidance, neglecting to commit to further interest rate hikes.
The ECB report read: ‘The Governing Council intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March and it will then evaluate the subsequent path of its monetary policy.’
Nevertheless, EUR firmed at the end of the week as the Eurozone’s final composite PMI cconfirmed that business activity continues to recover.
US Dollar (USD) Wavers on Mix of Fed Headwinds and Upbeat Data
USD/GBP: Up from £0.80 to £0.82
USD/EUR: Unchanged at €0.92
The US Dollar (USD) experienced volatility last week as the Federal Reserve’s interest rate decision weighed upon ‘Greenback’ sentiment, while positive data releases eased headwinds.
On Monday, a cautious market mood drew support toward the USD alongside a smaller-than-expected contraction in the Dallas Fed’s manufacturing index.
However, the currency came under pressure the following day as investors turned bearish ahead of the impending interest rate decision.
Midweek, the Federal Reserve hiked interest rates by 25bps as expected, but the move and accompanying commentary were interpreted as a dovish shift and USD exchange rates weakened further.
Thursday saw the US Dollar stage a recovery as a fall in initial jobless claims indicated that the US’ labour market was cooling; into Friday, the ‘Greenback’ continued to climb.
US Non-Farm payroll data showed that 517,000 jobs had been created and wage growth had fallen, raising hopes of further interest rate hikes from the Fed.