Euro (EUR) Climbs as ECB Rate Hike Bets Increase
EUR/GBP: Up from £0.87 to £0.88
EUR/USD: Unchanged at $1.06
Through the course of last week’s session the Euro (EUR) trended broadly higher, buoyed by increasing rate hike bets as inflation exceeded expectations in Germany and the wider Euro area.
At the start of the week, a fall in economic sentiment dented EUR morale, but losses were capped on Tuesday by rising inflation in France and Spain. Early reports from economists suggested that similar price pressures in Germany would add to doubts that the European Central Bank (ECB) will cease to hike interest rates.
Midweek, Germany’s preliminary inflation rate printed officially at 8.7% rather than the 8.5% forecast, strengthening speculation that the ECB would take a hawkish stance. Further supporting the single currency was confirmation that Eurozone manufacturing production had stabilised.
The Euro traded in a mixed range on Thursday and faced headwinds at the end of the week as the Eurozone’s finalised services PMI was revised lower. Nevertheless, EUR remained somewhat supported by hawkish comments from the ECB, as ECB board member Madis Muller remarked:
‘It is most likely that (March) will not be the last rate rise in the cycle. It’s also quite possible that interest rates we need to stay high for quite some time.’
Pound (GBP) Tumbles as Dovish BoE Undermines NI Protocol Optimism
GBP/EUR: Unchanged at €1.13
GBP/USD: Unchanged at $1.20
On Monday, the Pound (GBP) was supported against its peers by bullish rhetoric from the UK Prime Minister regarding a possible solution to the Northern Ireland protocol. The protocol has represented a sore spot in negotiations between the UK and European Union since Brexit occurred.
The following day, GBP continued climbing as the ‘Windsor Framework’ was unveiled. The agreed deal will reduce checks on goods moved between Northern Ireland and the rest of the UK.
Midweek, however, Sterling came under pressure as Bank of England (BoE) Governor Andrew Bailey gave a rather dovish speech. Bailey refused to commit to a definite course of action, saying:
‘I would caution against suggesting either that we are done with increasing bank rate, or that we will inevitably need to do more.’
Further subduing GBP were indications that the UK cost-of-living crisis was continuing to affect UK households: one such sign were UK house prices, which in February fell at the fastest rate since 2012.
On Thursday, a more hawkish speech from the BoE’s chief economist Huw Pill helped Sterling recoup some of its losses. Furthermore, Friday’s finalised services PMI exceeded expectations, which buoyed the Pound but failed to propel it back to Tuesday’s heights.
US Dollar (USD) Weakens as Bullish Trade Caps Gains
USD/GBP: Up from £0.82 to £0.83
USD/EUR: Down from €0.94 to €0.93
At the beginning of last week, the US Dollar (USD) softened in several exchange rates as consumer confidence printed below forecasts at 102.9 in February. A weaker-than-expected ISM manufacturing PMI further dented ‘Greenback’ sentiment midweek.
Bullish market sentiment capped risk-off tailwinds for the currency as the week wore on, with unexpected growth in China inspiring trading optimism. Following an increase in the country’s private-sector PMIs, Dr Wang Zhe, Senior Economist at Caixin Insight Group, said:
‘The economy saw a faster pace of recovery following a peak in the recent wave of Covid infections as supply and demand expanded, overseas demand surged, employment started to rebound, and logistics recovered at a faster pace.’
On Thursday, US jobless claims dropped as a series of high-profile layoffs appeared not to affect the country’s tight jobs market. The latest jobs report fuelled hopes that wages may be increased, fanning inflation and prompting the Federal Reserve to resume policy tightening measures.
USD optimism was undermined at the end of the week, as Friday’s non-manufacturing ISM PMI failed to inspire tailwinds. Despite exceeding expectations, growth was slower than in the previous month, leaving investors disappointed.