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Pound rallies on BoE rate hike bets
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US Dollar supported by surprise PCE rise.
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Euro falls as Germany’s outlook worsens.
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Market wary of worsening US debt ceiling situation.
GBP/EUR Exchange Rate: Pound Supported by Aggressive BoE Bets
The Pound Euro (GBP/EUR) exchange rate struck a five-month high over the past week. The Pound (GBP) found support from a significant repricing of Bank of England (BoE) interest rate expectations.
Renewed expectations of further policy tightening came after hotter-than-forecast inflation figures on Wednesday. Whilst headline inflation fell sharply from double digits to 8.7%, core inflation rose unexpectedly to a 31-year high of 6.8%.
Markets continued to price in an aggressive schedule of policy tightening from the BoE. Traders anticipate as much as 100bp of interest rate increases by the end of 2023. Expectations for which help to underpin Sterling.
Looking to the coming week, any additional rate hike signals could provide a boost to GBP. If the BoE pushes back on investors’ aggressive pricing then it could dent confidence in the Pound.
GBP/USD Exchange Rate: GBP Recovers as Retail Data Surprises
The Pound US Dollar (GBP/USD) exchange rate fluctuated over the past seven days. Initially, Sterling struggled amid some poor private sector data. The Confederation of British Industry’s (CBI) distributive trades figures fell sharply on Thursday despite forecast growth, sliding to -10 versus an expected increase to 10.
On the other hand, April’s retail sales volumes rose by 0.5% on Friday which bolstered GBP. Sales last month an above-forecast recovery despite the impact of inflation on consumers.
Sterling was muted on Monday due to a national holiday in the UK. Improving risk appetite, coupled with BoE rate hike bets, then revived the currency on Tuesday.
The Pound’s data calendar is relatively sparse for the coming week. The final reading of May’s PMIs could prompt some movement in GBP if they confirm a slowdown in May.
USD/GBP Exchange Rate: Surprise Core PCE Rise Bolsters USD
The US Dollar (USD/GBP) exchange rate saw some volatile movements over the past seven days. The safe-haven US Dollar (USD) initially benefitted from a pullback in global risk appetite. Investors were spooked by signs talks concerning the US debt ceiling had stalled.
The latest Federal Open Market Committee (FOMC) minutes capped USD’s gains on Wednesday, though. The minutes pointed to a deepening split between policymakers over the need for additional tightening.
USD suffered amid a risk-on mood on Thursday and into the first half of Friday. A surprise rise in the core PCE price index, the Federal Reserve’s preferred measure of inflation, prompted renewed rate hike bets. This in turn lifted the US Dollar.
USD investors will be keenly awaiting the releases of high-impact jobs data over the coming week. On Friday, May’s unemployment is set to rise alongside a fall in non farm payrolls. The signs of a cooling labour market could prompt a pullback in Fed bets and weigh on USD.
EUR/USD Exchange Rate: Euro Slips as Germany Enters Technical Recession
The Euro US Dollar (EUR/USD) exchange rate tumbled over the past week. The Euro (EUR) slipped as the outlook for Germany, the trading bloc’s largest member, worsened.
The final reading of first quarter GDP data for Germany pointed to worsening long-term prospects for the country. The final print was revised lower to report a 0.3% contraction, resulting in Germany slipping into a technical recession in the winter.
Downbeat comments from European Bank Economist (ECB) Philip Lane applied additional pressure to the Euro on Friday. Before hawkish signals from other ECB policymakers on Monday helped to limit these losses.
Eurozone data on Thursday could have a mixed effect on the single currency if it prints as forecast. Inflation is set to slip to 6.3%, although employment is expected to remain close to record-lows. Evidence of a still-tight labour market could boost EUR off the back of ECB rate hike bets.