Pound Hits Multi-Month Highs as UK Avoids 2022 Recession, US Dollar Plunges as Core Inflation Softens

  • Pound buoyed by persistent BoE rate hike bets.

  • US Dollar slips after softer inflation data.

  • Euro gains limited amid mixed data releases.

  • Risk appetite remains positive as signs of banking turmoil recede.

GBP/EUR Exchange Rate: Pound Supported by BoE Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate firmed over the past week. Sterling’s gains were initially muted after the recent turmoil in the European banking markets.

However, the Pound (GBP) was lifted over the course of the week by continued Bank of England (BoE) interest rate hike bets. Markets continued to price in a 25bps rate rise from the BoE at their May meeting. BoE Chief Economist Huw Pill signalled on Tuesday that the central bank may need to pursue further tightening.

These advances were tempered by more cautious comments earlier in the week. Policymaker Catherine Mann hinted that further interest rate increases could be ‘difficult’ due to the mixed inflationary pressures in the UK.

Sterling could find further support over the next seven days if markets continue to price in further policy tightening from the BoE. However, movement may be limited due to the bank holiday Easter weekend.

GBP/USD Exchange Rate: Sterling Climbs as UK Avoids 2022 Recession

The Pound US Dollar (GBP/USD) exchange rate climbed to its highest point since June 2022 in the past seven days.

An improving outlook for the UK’s economy provided a boost to GBP on Thursday. A survey from the Confederation of British Industry (CBI) found that UK businesses expect a return to growth in the second quarter of 2023.

The Pound continued its rise after an upward revision in fourth-quarter GDP growth. The final reading of the data revealed a 0.1% expansion in the UK’s economy at the end of last year, confirming that the country avoided a recession and signalling that it is more resilient than previously thought.

The coming week brings very little UK data for Sterling, with UK bank holidays on Friday and Monday adding to the scarcity of economic releases. Following this, the British Retail Consortium’s (BRC) retail sales monitor for March is expected to cool on Tuesday. Signs of a downturn in the UK’s retail sector could weigh on the Pound.

USD/GBP Exchange Rate: US Dollar Tumbles amid Signs of Labour Market Slack

The US Dollar Pound (USD/GBP) exchange rate tumbled to ten-month lows over the past week. The US Dollar (USD) initially wavered as risk appetite returned to the markets. A recovery in US Treasury bond yields limited any downturn for the safe-haven ‘Greenback’.

USD managed to make up some lost ground on Friday, although the currency saw its upward movement capped by softer inflation data. The core PCE price index, the Federal Reserve’s preferred measure of inflation, edged lower to 4.6% in February. The data weakened Fed rate hike bets.

The US Dollar saw a further decline on Monday amid poor data for the US manufacturing sector. Evidence of slack in the US labour market prompted renewed losses for USD on Tuesday. The latest JOLTs job openings figures saw a bigger-than-forecast fall in vacancies.

High-impact employment data on Friday could pull USD lower if it prints as forecast. Non-farm payrolls are set to have softened in March, which could indicate additional cooling in the US labour market. An expected easing in US inflation on Wednesday could also dent confidence in the ‘Greenback’ if markets pare back Fed rate hike bets.

EUR/USD Exchange Rate: Euro Gains Capped by Mixed Economic Data

The Euro US Dollar (EUR/USD) exchange rate climbed to a two-month high in the past week, although mixed Eurozone economic data limited the Euro’s (EUR) upside potential.

EUR was boosted on Thursday by a rise in consumer inflation expectations. This caused increased market bets on action from the European Central Bank (ECB). Cooler German inflation figures kept EUR in a limited range, however.

Softer Eurozone inflation on Friday saw the single currency weaken as it dampened expectations for further ECB policy tightening. The Euro recovered lost ground on Wednesday, though, as German factory orders surged, although a downwardly revised services PMI capped gains.

The Euro could see a boost on Tuesday if February’s retail sales see a positive performance as forecast. Any shifts in sentiment regarding the ECB’s policy path could also cause movement in EUR.

Gareth Monk

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