Pound Recovers amid Surprise Private Sector Growth, USD Firms on Increasing Rate Hike Bets

  • Pound recovers on surprise service sector growth.
  • Euro dented by Ukraine-Russia concerns.
  • US Dollar firms as rate hike bets continue to increase.
  • Ukraine-Russia war in focus.

GBP/EUR Exchange Rate: Pound Recovers Following Sharp CPI Cool

The Pound Euro (GBP/EUR) exchange rate initially nosedived in the second half of last week, following the UK’s latest CPI data. Both headline and core inflation softened further than expected, leading to a pullback in Bank of England (BoE) rate hike bets.

However, Sterling was able to recover modestly at the end of last week, due to stronger-than-expected retail sales data. January’s figures showed a surprise increase, pointing to a resilient economy.

Headlines regarding a potential breakthrough in the dispute over the Northern Ireland Protocol infused volatility into the Pound amid some back and forth on whether a deal could be signed this week.

This week, the Pound has continued to recover its losses after the UK’s private sector indexes snapped a six-month contraction. Looking ahead, with impactful data thin on the ground, Sterling could trade on speeches from BoE policymakers. With the usually hawkish Catherine Mann scheduled to speak, GBP could rally further.

GBP/USD Exchange Rate: Pound Revived by Surprise Private Sector Growth

The Pound US Dollar (GBP/USD) exchange rate traded in a wide range over the past week, as investors reacted to upbeat economic data.

Sterling was able to recover its losses after the CPI data, following Tuesday’s private sector indexes. These showed that activity among the UK’s services sector had returned to growth, snapping a multi-month losing streak.

The surprising resilience of the UK economy left room for further tightening from the BoE, and propelled the Pound sharply higher.

Next week, UK data releases remain thin on the ground. As such, the Pound could trade on market sentiment. With the Northern Ireland Protocol being in active discussion, news of a solution could strengthen Sterling.

USD/GBP Exchange Rate: US Dollar Firms on Increased Rate Hike Bets.

The US Dollar Pound (USD/GBP) exchange rate firmed over the past week, as USD investors renewed bets on interest rate hikes.

Stronger-than-expected retail sales brought USD strength last week, which was further bolstered as the US labour market remained tight.

PPI data for January added further strength to the ‘Greenback’ after printing above forecasts. Between resilient spending, a tight labour market and sticky inflation, pressure was piled onto the Federal Reserve to maintain its current tightening cycle.

Looking ahead, Friday’s core PCE price index data will be in the spotlight. With an increase expected to 4.4% in the Fed’s preferred inflation gauge, rate hike bets could increase and strengthen USD.

EUR/USD Exchange Rate: Euro Slumps as Ukraine-Russia Fears Increase

The Euro US Dollar (EUR/USD) exchange rate slumped over last seven days, despite persistently hawkish comments from the European Central Bank.

ECB President Christine Lagarde reaffirmed a 50bps rate hike at the next meeting, to largely deaf ears. Analysts appeared to disagree with the bank’s perspective on core inflation.

Ultimately, fears over escalations in the Ukraine-Russia war kept the single currency on the backfoot. With the war showing little sign of ceasing, investors remained tentative around EUR, despite upbeat Eurozone PMIs.

Looking ahead, the Ukraine-Russia war is likely to remain dominant for EUR investors. With the one-year anniversary approaching, fears of a renewed ground assault are increasing. If any further escalation occurs, the Euro is likely to remain muted.

John Mulcahey

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