Pound rises amid hawkish BoE, US Dollar craters on Fed rate cut signals

GBP/EUR exchange rate fluctuates on mixed UK data

The Pound Euro (GBP/EUR) exchange rate has fluctuated over the past week in response to some mixed UK economic releases

This was initially driven by an unexpected contraction in the UK economy. In October, UK GDP shrank by 0.3% instead of stalling as expected, bring fresh worries about the country’s economic outlook.

GBP/EUR then fluctuated as focus shifted to the latest interest rate decisions from the Bank of England (BoE) and European Central Bank (ECB).

Sterling then jumped at the end of last week on the back of a forecast-beating service sector index for December.

This week we have seen the GBP/EUR exchange rate slide to its worst levels since the end of November following the UK’s latest inflation figures as headline and core inflation both cooled beyond forecasts in November.

Looking ahead, the Pound could attempt to mount a recovery before markets break for Christmas if the UK’s latest retail sales figures print positively.

GBP/USD exchange rate soars on hawkish BoE

The Pound US Dollar (GBP/USD) exchange rate shot higher last week, with the pairing briefly striking a new three-month high.

This followed the BoE’s final interest rate decision of the year. While the BoE left rates on hold this month, it made a concerted effort to push back against rate cut speculation, reiterating that rates will need to remain higher for longer. This was in stark contrast to the dovish Federal Reserve.

On Monday, however, the Pound began to soften as the UK’s economic outlook came into focus. Accountancy giant KPMG warned of a bleak outlook.

While an upbeat market mood helped the GBP/USD exchange rate to rally again on Tuesday, this proved short lived as the latest UK inflation figures revived BoE rate cut speculation.

Next week, thin trading conditions could limit movement in GBP/USD as markets close for the Christmas holidays.

USD/GBP Exchange Rate: US Dollar Craters amid Fed Rate Cut Bets

The US Dollar Pound (USD/GBP) exchange rate sank over the past seven days, following the Federal Reserve’s dovish interest rate decision.

Wednesday saw the ‘Greenback’ slide as Fed Chair Jerome Powell took an unexpectedly dovish stance. He outlined caution over keeping rates too high for too long, fuelling speculation of a March rate cut.

While US retail sales recovered in November, the upbeat news prompted bullish trade, weighing on the safe-haven currency.

However, warnings of a market overreaction from Fed policymaker John Williams strengthened USD on Friday. Williams pushed back against rate cut speculation, bringing tailwinds for the beleaguered ‘Greenback’.

Amid a cautious start to this week’s session, the US Dollar gained ground on Monday. However, persistent rate cut bets limited its upside.

Then, an improving market mood weakened the US Dollar on Tuesday as investors shunned safe-haven assets.

On Friday, the latest core PCE price index is due to release. The Fed’s preferred inflation gauge is forecast to have cooled in November, which may weaken USD by sparking rate cut bets.

EUR/USD Exchange Rate: Euro Strengthens Despite Dismal Economic Data

The Euro US Dollar (EUR/USD) exchange rate strengthened over the last week, despite downbeat economic data.

Last Wednesday, Eurozone industrial production printed below forecasts. In October, activity contracted by 0.7%, furthering concerns over the bloc’s economy.

The European Central Bank (ECB) left interest rates unchanged at its recent meeting. But ECB President Christine Lagarde stated that the bank had not discussed rate cuts, which propelled the common currency sharply higher.

However, the latest private sector indexes both printed below forecasts on Friday. With the bloc’s economy continuing to weaken, EUR saw its appeal limited.

Hawkish rhetoric from ECB policymakers saw the common currency rise on Monday, as they pushed back against imminent rate cuts.

Throughout the week, persistent weakness in the US Dollar supported the Euro, due to the pairing’s negative correlation.

Data releases are minimal for the Euro over the coming week, which could sap sentiment towards the common currency.

John Mulcahey

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