Pound Bolstered by UK-EU NI Deal, US Dollar Strengthened by Fed Rate Hike Bets

  • Pound sees fresh optimism as UK-EU NI trade deal announced.

  • US Dollar finds support from hawkish Fed expectations.

  • Euro’s gains capped by intensification in Russia-Ukraine conflict.

  • UK and EU markets await DUP’s response to ‘Windsor Framework’.

GBP/EUR Exchange Rate: Pound Rallies as UK & EU Agree NI Deal

The Pound Euro (GBP/EUR) exchange rate traded in a wide range over the past seven days. The Pound (GBP) initially strengthened on Thursday by hawkish comments from Bank of England (BoE) policymaker Catherine Mann.

GBP then rallied through the first half of this week as UK Prime Minister Rishi Sunak confirmed that a new UK-EU Northern Ireland trade agreement had been reached.

The deal, dubbed the ‘Windsor Framework’, propelled GBP/EUR to a three-week high, before some profit taking quickly reversed these gains.

Looking to the next seven days, further developments surrounding the UK-EU NI deal could prompt movement in Sterling. The DUP is yet to accept the terms of the deal, and any intervention from them could generate headwinds for GBP.

GBP/USD Exchange Rate: UK Housing Sector Slumps Weighs on Sterling

The Pound US Dollar (GBP/USD) exchange rate was also volatile over the course of the past week.

Sterling initially saw gains on Wednesday as markets continued to digest Tuesday’s better-than-expected PMI figures and speculate regarding future BoE rate hikes.

A lack of data for GBP saw the Pound subsequently retreat through the second half of last week’s session.

The unveiling of the ‘Windsor Framework’ on then propelled the GBP/USD exchange rate sharply higher at the start of this week, before evidence of a further downturn in the UK’s housing market on Wednesday capped these gains.

Looking ahead, the final reading of February’s services sector PMI could bolster GBP on Friday. The reading is expected to confirm a dramatic rebound in growth in the sector last month.

USD/GBP Exchange Rate: US Dollar Bolstered by Hawkish Fed Meeting Minutes

The US Dollar Pound (GBP/USD) exchange rate fluctuated over the past seven days. The US Dollar (USD) saw some gains on Wednesday after the release of the latest hawkish Federal Reserve meeting minutes.

Thursday’s jobless claims added to USD’s gains. The claims remained close to previous lows, indicating a tight labour market. A downward revision in GDP growth capped gains for the US Dollar, however.

An above-forecast rise in the core PCE price index, the Fed’s preferred measure of inflation, then turbocharged USD exchange rates on Friday.

However a sharper-than-expected slump in US durable goods orders in January saw the US Dollar then pare these gains at the start of this week.

USD could see a boost on Friday if the latest ISM Non-Manufacturing PMI prints in positive territory as expected. Additionally, testimony from Fed Chair Jerome Powell on Tuesday will be closely watched by USD investors.

EUR/USD Exchange Rate: Core Inflation Uptick Bolsters Euro

The Euro US Dollar (EUR/USD) exchange rate traded erratically over the past week as mixed data releases kept EUR investors guessing.

The Russia-Ukraine conflict weighed on the Euro (EUR) in the second half of last week as hostilities and rhetoric continued to escalate.

The publication of Germany’s latest GDP figures on Friday kept EUR on the back foot. Germany’s economy contracted by more-than-expected, heightening the risk of recession in the trading bloc’s largest economy.

The single currency then bounced back through the first half of this week as stronger-than-expected French and Spanish inflation releases bolstered expectations for further rate hikes from the European Central Bank (ECB).

Multiple data releases for the Eurozone on Thursday could have a mixed effect on the EUR. On the one hand, February’s inflation is forecast to cool. This could prompt a pullback in ECB rate bets and pull the Euro lower. On the other hand, January’s unemployment is set to remain low which could bolster EUR.

Gareth Monk

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