Euro (EUR) Climbs on Hawkish ECB
EUR/GBP: Unchanged at £0.88
EUR/USD: Unchanged at $1.06
Euro (EUR) exchange rates rose last week, despite headwinds midweek.
A hawkish European Central Bank (ECB) prompted an uptick in the currency on Monday as chief economist Philip Lane signalled that the central bank would raise interest rates at its May meeting. Subsequently, policymaker Robert Holzmann advocated for additional 50bps rate rises.
Into Tuesday, German factory orders expanded by more than expected, triggering a further upside for EUR. Midweek, however, the single currency flatlined against several peers as mixed data compromised tailwinds.
Industrial production in Germany increased by significantly more than forecast, but retail sales unexpectedly contracted. Furthermore, the Eurozone economy stalled in Q4 – although widely predicted, the release dented EUR morale nevertheless.
At the end of the week, the Euro softened as more dovish voices from the ECB countered earlier hawkish comments. Developments in Ukraine also triggered a risk-off mood as a shell attack struck critical infrastructure and killed 11 civilians.
Pound (GBP) Rebounds as UK Economy Expands
GBP/EUR: Up from €1.12 to €1.13
GBP/USD: Unchanged at $1.20
The Pound (GBP) encountered multiple headwinds during the week but nevertheless shot up against its rivals on Friday as UK GDP increased by more than expected.
On Monday, Brexit headwinds resurfaced. With optimism over the Windsor framework waning, GBP was dented as oil giant Shell said that US investment was more attractive than prospects in the UK.
Into Tuesday, the British Retail Consortium (BRC) warned of the impact of inflation on spending. Sterling support was also sapped by central bank policy divergence: a hawkish Federal Reserve made the Bank of England (BoE)’s dovish position stark in comparison.
Midweek, BoE policymaker Swati Dhingra reinforced the central bank’s cautious tone, warning that raising rates too high risked unnecessarily denting output at a time when the economy is weak.
On Thursday however, Pound exchange rates rebounded: a correction in GBP exchange rates lent tailwinds alongside a more bullish tone among investors.
The UK’s GDP release at the end of the week enabled the Pound to soar: the UK economy was shown to have expanded by 0.3% in January as opposed to the 0.1% forecast. The Office for National Statistics (ONS) attributed growth to the widespread return of activity in the education, health and recreation sectors.
US Dollar (USD) Weakens amid Tight US Labour Market
USD/GBP: Unchanged at £0.83
USD/EUR: Unchanged at €0.93
The US Dollar fluctuated against its peers over the course of the week, intermittently buoyed by central bank tailwinds and depressed by downbeat data.
At the beginning of the week, a bearish market mood lent some support – but gains were capped by a contraction in US factory orders.
On Tuesday, the Chairman of the Federal Reserve Bank gave his testimony before congress. Jerome Powell’s hawkish tone inspired a significant uptick in USD exchange rates: the Fed chair signalled the central bank may accelerate its pace of monetary policy tightening.
Midweek and into Thursday, ‘Greenback’ gains were capped as indications of a tight US labour market were contrasted with an increase in jobless claims. Raising interest rates too high while unemployment proliferates threatens to dent the economy.
At the end of the week, wage growth levels slowed unexpectedly, weighing further on the US Dollar. Cailin Birch, global economist at the Economist Intelligence Unit, commented:
‘The US labor market is undoubtedly still strong, but the softer February data fits with our view that it will weaken over the course of 2023 as consumer spending eventually slows.’