US Dollar Falls as Fed Signals Policy Slowdown, Pound Trades Higher despite Hints of Pause from BoE

  • Pound gains despite signs of BoE slowdown.

  • US Dollar slides as Fed hints at imminent policy tightening pause.

  • Euro bolstered by hawkish ECB rhetoric.

  • European banking sector stabilises following Deutsche Bank selloff.

GBP/EUR Exchange Rate: Pound Sees Limited Gains amid Mixed BoE Signals

The Pound Euro (GBP/EUR) exchange rate edged higher over the past seven days. The Pound (GBP) initially fluctuated on Thursday after the Bank of England’s (BoE) interest rate decision. The BoE hiked rates by 25bps as expected.

Mixed signals from BoE Governor Andrew Bailey following the decision prompted additional volatility in Sterling.

Whilst Bailey hinted that the central bank is nearing the end of its rate hike schedule, he also signalled that signs of embedded inflation may necessitate further policy tightening.

Looking to the week ahead, any further signs of forward policy from BoE policymakers could drive movement in Sterling. If markets price in an upcoming pause from the central bank it could weigh on the Pound.

GBP/USD Exchange Rate: Sterling Finds Support from Positive Retail Data

The Pound US Dollar (GBP/USD) exchange rate climbed during the past week. The Pound initially saw a boost on Wednesday after hotter-than-expected inflation figures, although a market correction erased many of these gains.

The BoE’s interest rate decision lent little support to the Pound on Thursday as the 25bps rate hike had largely been priced in by markets. Friday’s buoyant retail data bolstered Sterling as February’s sales rose by 1.2%. However, downbeat PMI figures kept any gains limited.

Further upbeat data for the UK’s retail sector on Monday pushed GBP higher. Hawkish signals from BoE Governor Andrew Bailey also lifted Sterling.

The UK’s final fourth-quarter GDP report could push the Pound higher on Friday. Although the British economy is expected to have stalled, this means it will have dodged a recession in 2022. The final reading of March’s services sector PMI could also inspire movement in GBP on Wednesday.

USD/GBP Exchange Rate: US Dollar Dented by Hints of Fed Pause

The US Dollar Pound (USD/GBP) exchange rate fell during the past seven days. The US Dollar (USD) began to lose ground on Wednesday following the Federal Reserve’s interest rate meeting. The Fed hiked rates by 25bps but indicated that a rate hike pause was likely.

USD managed to regain some lost ground as the week went on due to a risk-off mood. Fresh turmoil in the European and US banking sectors prompted fears of more lenders collapsing. An improving risk appetite erased these gains as the week went on, however.

Poor data releases on Friday deepened losses for the US Dollar. February’s durable goods orders fell by 1% versus forecasts of 0.6% growth. Additionally, private sector output slumped in March.

The US Dollar will see a flurry of data releases in the coming seven days. Of note is the latest reading of the core PCE price index. The Fed’s preferred measure of inflation is set to have cooled in February, which could weigh on USD.

EUR/USD Exchange Rate: Euro Climbs despite Banking Sector Jitters

The Euro US Dollar (EUR/USD) exchange rate rose over the past seven days. The Euro (EUR) found persistent support from hawkish signals from European Central Bank (ECB) policymakers.

A fresh selloff in the European banking sector pulled EUR lower on Friday. Deutsche Bank, Germany’s largest lender, saw sustained selling of its shares. This prompted fresh fears of European financial instability.

The single currency managed to reverse its losses on Monday following optimistic German data. Business confidence rose unexpectedly in March, hitting its highest level since February 2022. On the other hand, the Euro’s gains were capped by a return of risk appetite on Wednesday.

Looking to the coming week, a forecast easing in Eurozone inflation could see the Euro fall as it may dampen ECB rate rise bets.

Gareth Monk

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