Pound Slides on Dovish BoE Forward Guidance, USD Climbs on Rate Hike Hopes

• Pound (GBP) slides as BoE turns dovish.
• Euro (EUR) falls on increasing recession anxieties.
• US Dollar (USD) strengthens on bumper payroll print.
• UK GDP in the spotlight.

GBP/EUR Exchange Rate: Pound Slides on Dovish BoE Pivot

The Pound Euro exchange rate struck a four-month low at the end of last week, following a dovish pivot from the Bank of England (BoE).

The Bank of England delivered a widely expected 50bps rate hike, but accompanied it with dovish forward guidance. Sterling nosedived as GBP investors speculated the BoE may be nearing the end of its current tightening cycle.

However, the start of this week saw Sterling rebound on the back of hawkish remarks from BoE Policymaker Catherine Mann. While she usually takes a hawkish attitude, her perspective that further hikes were necessary saw GBP rally.

Looking ahead, Friday brings the latest GDP data for the UK. The quarterly data is of keen note, as it is currently forecast to show the UK’s economy stalled in Q4. This would see the UK avoid slipping into a recession at the end of 2022 and help bolster the Pound.

GBP/USD Exchange Rate: Pound Dented by Mass Industrial Action

The Pound US Dollar exchange rate fell over the past week, striking its lowest levels since January. In addition to a dovish BoE, Sterling came under pressure amid continued domestic turbulence.

Last Wednesday, over 475,000 UK workers enacted ‘walkout Wednesday’, taking the largest coordinated strike action in over a decade. These strikes served to keep Sterling muted.

Exerting further pressure on the Pound this week was a readjusting of investor expectations for future rate hikes.

Bank of England Senior Economist Huw Pill cautioned against further interest rate hikes, which led to a dramatic pullback in support for GBP.

Turning to next week’s session could an underwhelming UK jobs report apply further pressure to the Pound?

USD/GBP Exchange Rate: US Dollar Climbs on Oscillating Rate Hike Bets

The US Dollar Pound exchange rate climbed over the past week, as rate hike bets from USD investors remained in flux.

While the Federal Reserve’s initial 25bps rate hike sent the ‘Greenback’ downwards, forecast-smashing non farm payrolls data reversed these losses. Printing at 517,000, far above the expected 185,000, the data pointed to an incredibly hot labour market.

Furthermore, wage growth also appeared to fall, leaving room for further tightening from the Fed. Because of this, the ‘Greenback’ overcame the losses seen after the initial decision, and remained steady at the beginning of this week.

Looking ahead, the University of Michigan is due to publish their consumer sentiment index for February. Another improvement in consumer sentiment this month could help the US Dollar maintain a positive trajectory through to the end of the week.

EUR/USD Exchange Rate Tumbles on Recession Fears

The Euro US Dollar exchange rate fell last week, as recession concerns served to bring the single currency down.

Last week, headline inflation cooled further than expected. However, core inflation ticked upward, inspiring hope for continued tightening from the European Central Bank (ECB).

The Euro then stumbled following the ECB’s hawkish interest rate hike. While the bank raised rates by 50bps, EUR sentiment weakened as the bank implied it would pause its hiking cycle following its March decision.

At the start of this week, the Euro has been kept on the back foot following worse-than-expected retail sales, and fears of a German recession. The bloc’s largest economy saw industrial production decline sharply in December, prompting fears of a wider downturn.

Looking ahead, with EUR data relatively thin on the ground, Ukraine developments could play a role in shaping the direction of the Euro. Will additional signs that Russia is planning a massive ground offensive leave the Euro on the back foot?

John Mulcahey

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