US Dollar (USD) Firms as Rate Hike Bets Increase
USD/GBP: Unchanged at £0.83
USD/EUR: Up from €0.93 to €0.94
Early last week, a relatively upbeat market mood kept a lid on US Dollar (USD) gains while Monday’s Presidents Day holiday meant quiet trading conditions.
Tuesday’s flash PMI data inspired an initial uptick in ‘Greenback’ exchange rates as the country’s service sector returned unexpectedly to growth; USD subsequently tumbled, however, as strength in its peers undermined bearish sentiment.
Midweek, increasing geopolitical tensions drew support to the currency. Russian President Vladimir Putin pulled back from the New Start nuclear treaty, triggering alarm amongst UN nations.
Alongside political tailwinds, the US Dollar enjoyed a boost following the release of the latest minutes from the Federal Open Market Committee (FOMC). Members of the committee struck a hawkish tone:
‘Participants… stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path.’
USD continued to climb into the end of the week: the core PCE price index printed above expectations, further encouraging hopes that the Fed would continue to hike interest rates.
Pound (GBP) Rises as Services PMI Exceeds Forecast
GBP/EUR: Up from €1.12 to €1.13
GBP/USD: Down from $1.20 to $1.19
The Pound (GBP) enjoyed an uptick against its peers through the first half of the week. A solid recovery in the UK’s service sector encouraged hopes of hawkish monetary policy from the Bank of England.
On Monday, Sterling gains were capped by uncertainty over the Northern Ireland protocol – Rishi Sunak appeared ready to progress with an EU deal but faced significant criticism from UK MPs.
Tuesday saw the currency climb as February’s services PMI printed at 53.3 from 48.7 in January. Economists speculated over the implications for the BoE. Midweek, GBP weakened slightly as Brexit fears re-emerged.
On Thursday, a hawkish speech from BoE policymaker Catherine Mann lent fresh tailwinds to the Pound:
Mann said: ‘Further tightening and sooner rather than later likely is needed to ensure the effectiveness of monetary policy to achieve the objective of 2% sustainably in the medium term.
At the end of the week, Sterling came under renewed pressure amid geopolitical tensions and supply chain complications.
Shortages of some vegetables in UK supermarkets drew attention to the country’s struggle with food inflation as retailers struggle to meet demand.
Euro (EUR) Pressured by German Economy, Geopolitical Tensions
EUR/GBP: Unchanged at £0.88
EUR/USD: Down from $1.06 to $1.05
The Euro (EUR) experienced multiple headwinds this past week. While economic sentiment climbed in the bloc, manufacturing activity fell and increasing tensions between Russia and the West weighed upon the risk sensitive currency.
Consumer confidence improved only marginally at the beginning of the week, limiting EUR gains.
Into Tuesday, service-sector activity increased in both Germany and the Eurozone by more than expected: but tailwinds were capped by a disappointing manufacturing PMI.
While economic sentiment improved, the single currency remained subdued into Wednesday. German inflation printed as expected; the Ifo business climate indicator increased in February but printed lower than forecast.
Hawkish minutes from the FOMC also subdued EUR on account of the strong negative correlation between the Euro and US Dollar.
Eurozone inflation met expectations into Thursday and the single currency wavered as Russia celebrated a year since its invasion of Ukraine.
On Friday, a greater-than-expected contraction in Germany’s economy at the end of last year led to further EUR losses.