Pound Firms as Inflation Remains Persistently High, Euro Pushed Higher by ECB Rate Hike Bets

  • Pound climbs as March inflation remains in double digits.

  • US Dollar softens after surprise jobless claims rise.

  • Euro firms as ECB speeches increase rate hike bets.

  • Market mood largely cautious amid fears of global slowdown.

GBP/EUR Exchange Rate: Pound’s Gains Capped by Mixed BoE Bets

The Pound Euro (GBP/EUR) exchange rate ticked lower over the past week. The Pound initially gained ground amid renewed Bank of England (BoE) rate hike bets. However, gains were capped by expectations the BoE’s May hike could be its last.

Contrasting surveys of economists regarding the central bank’s forward path also dampened enthusiasm for Sterling. A poll of economists by Reuters suggested that the BoE would decide to hike rates by 25bps by a narrow margin, whereas a Bloomberg survey indicated that rates would be left on pause.

Hints from BoE policymaker Ben Broadbent that UK inflation may be easing weighed on GBP on Tuesday.

The Pound’s movements may be inspired by BoE bets over the coming week. Markets have largely priced in the forecast hike.

GBP/USD Exchange Rate: GBP Bolstered by Hotter-than-Forecast Inflation

The Pound US Dollar (GBP/USD) exchange rate rose over the past seven days after some volatile movements. Sterling was first pushed higher by hotter-than-forecast UK inflation. March’s inflation rate remained in double digits, prompting renewed BoE bets.

A larger-than-forecast slump in March’s retail sales pulled Sterling lower on Friday, as well as a drop in manufacturing sector output. An expansion in the UK’s dominant services sector cushioned GBP’s losses, though.

The Pound weakened on Wednesday amid evidence of easing inflation, however. The latest surveys from the Confederation of British Industry (CBI) showed that cost pressures in the manufacturing sector were cooling.

Looking ahead, the final reading of April’s manufacturing sector PMI could prompt a downturn in GBP if it confirms a contraction in the sector on Tuesday.

USD/GBP Exchange Rate: US Dollar Dips as Manufacturing Sector Struggles

The US Dollar Pound (USD/GBP) exchange rate stumbled over the past seven days. A risk-off mood helped the US Dollar (USD) climb on Wednesday, although a lack of data saw USD shed some of these losses.

The ‘Greenback’ slipped further on Thursday after an above-forecast rise in jobless claims. The figures prompted a pullback in market expectations of additional Federal Reserve rate hikes. Downbeat data for the US manufacturing sector added to the currency’s losses.

Friday’s PMIs helped USD to recover some lost ground. Performance across the private sector improved by more than forecast. A fall in US Treasury bond yields saw the currency give up some of its gains, however.

Turning to the coming week, the US Dollar could slip on Thursday if first-quarter growth cools as forecast, although the 2% expansion could limit any losses. The latest reading of the core PCE price index, the Fed’s preferred measure of inflation, could bolster USD if the monthly rate remains at 0.3% though. This could bolster Fed bets ahead of the central bank’s interest rate decision on Wednesday. Any hawkish signals could push USD higher.

EUR/USD Exchange Rate: Euro Strengthened by Hawkish ECB Signals

The Euro US Dollar (EUR/USD) exchange rate firmed over the past seven days. The Euro (EUR) was first strengthened by the final reading of Eurozone core inflation on Wednesday. Underlying inflationary pressures remained stubbornly high.

The latest European Central Bank (ECB) meeting minutes prompted limited gains for EUR on Thursday. Whilst the minutes signalled further hikes, they also suggested a split amongst policymakers.

Strong PMI figures for the bloc’s services sector saw the Euro make gains on Friday, however. The single currency saw a further boost on Monday following hawkish comments from ECB policymaker Pierre Wunsch.

Looking forward, positive growth data for the Eurozone on Friday could limit any potential gains for the Euro. The bloc’s economy is forecast to have expanded in the first quarter of 2023, after stalling at the end of 2022. Cooler Eurozone inflation for April could dent confidence in EUR if it prints as forecast on Tuesday.

Gareth Monk

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