Pound Bolstered by Strong Inflation Release, US Dollar Recovers amid Fed Rate Hike Bets

  • Pound supported by hotter-than-expected inflation.

  • US Dollar reverses losses amid increased Fed rate hike bets.

  • Euro firms as markets bet on 50bps ECB hike.

  • US inflation downturn prompts risk-on mood.

GBP/EUR Exchange Rate: Pound Declines amid Mixed BoE Bets

The Pound Euro (GBP/EUR) exchange rate trended lower over the past week. The Pound (GBP) came under pressure initially amid fresh Northern Ireland tensions.

Mixed bets on the direction of the Bank of England’s (BoE) monetary policy prompted mixed movements in GBP over the course of the week. To begin with, hawkish comments from BoE Governor Andrew Bailey lent some support to the Pound on Wednesday.

On the other hand, dovish comments from policymaker Silvana Tenreyro kept GBP on the defensive on Thursday.

The latest surveys of economists added to the uncertainty around the BoE’s path of policy tightening on Monday. Whilst a poll by Reuters found a slim majority favouring a rate hike, the results of a poll by Bloomberg indicated a pause in rate hikes.

Sterling is likely to see movement inspired by BoE rate hike bets in the coming days.

GBP/USD Exchange Rate: GBP’s Losses Cushioned by Strong Wage Growth

The Pound US Dollar (GBP/USD) exchange rate saw some volatile movements over the past seven days, with GBP/USD ultimately losing ground.

The Pound (GBP) weakened in the second half of last week following GDP data for February. The figures bucked forecasts to indicate that the UK economy stalled in February versus a forecast expansion of 0.1%.

This week has seen Sterling fluctuate. Jobs data on Tuesday prompted a mixed response in the Pound. On the one hand, a surprise rise in unemployment and above-forecast job growth sapped GBP sentiment.

On the other hand, wage growth data for February remained strong after expectations of easing inflationary pressures. The data prompted renewed BoE rate hike bets and lent support to GBP. This was reinforced by Wednesday’s stronger-than-expected inflation figures.

Friday’s data could keep the Pound volatile if it prints as forecast. Whilst retail sales growth is forecast to have slumped in March, service sector growth is expected to have remained strong.

USD/GBP Exchange Rate: USD Recovers Lost Ground after Hawkish Fed Comments

The US Dollar Pound (USD/GBP) exchange rate rose over the past week, although saw some drastic shifts over the course of the week.

The US Dollar (USD) began on the backfoot after a weaker-than-expected consumer price index on Wednesday. Headline inflation fell to 5% in March, which caused markets to pare back their bets on further rate hikes from the Federal Reserve.

USD continued its downward spiral as further data releases added to expectations of a Fed slowdown. The release of the Fed’s latest meeting minutes on Wednesday evening and drop in PPI on Thursday weighed on the currency.

Friday saw a sharp recovery for the US Dollar, however. Fed policymaker Christopher Waller signalled that further interest rate hikes from the central bank were needed. Following this, markets began to reprice in a 25bps hike from the Fed.

USD come be pushed lower by a downturn in private sector performance on Friday. However, the US Dollar could find a boost next Wednesday if durable goods recover as expected.

EUR/USD Exchange Rate: Euro Climbs as ECB Set for 50bps Hike

The Euro US Dollar (EUR/USD) exchange rate firmed over the past seven days. The Euro (EUR) initially found a boost from upbeat comments by European Central Bank (ECB) officials. EUR also benefitted from a weaker US Dollar over much of the past week.

Above-forecast Eurozone industrial production added to EUR’s gains on Thursday. But these gains were capped by Russia-Ukraine worries.

A resurgent US Dollar on Friday saw the Euro weaken due to the negative correlation between the two currencies. A surprise drop in German investor morale on Tuesday added to the Euro’s downturn.

Looking ahead, April’s preliminary PMIs could boost EUR exchange rates if growth in the services sector improves as expected. A forecast rise in German business confidence on Monday could also inspire gains in EUR.

Gareth Monk

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