Pound mixed amid fluctuating BoE rate cut bets
The Pound softened at the start of last week, amid rising Bank of England (BoE) interest rate cut bets. Former BoE Chief Economist Andy Haldane called for the bank to cut rates soon, weakening GBP.
This was followed by a testimony to the UK Treasury committee by BoE Governor Andrew Bailey and other policymakers. Their discussions prompted speculation of later-than-expected rate cuts, lifting Sterling.
Despite robust preliminary PMIs, the Pound failed to capitalise and wavered on Thursday. However, Friday saw the Pound gain ground amid improving hope for the UK economy.
UK energy regulator Ofgem announced a significant cut in the energy price cap, which would ease the cost-of-living crisis.
Looking ahead, the core catalyst of movement for the Pound is likely to be a slate of speeches from BoE policymakers. Chief Economist Huw Pill is due to speak later this morning, followed by policymaker Catherin Mann on Wednesday.
If they both indicate a preference for hawkish monetary policy, the Pound could strengthen. However, if they highlight the split between the Monetary Policy Committee, GBP could soften.
US Dollar struggles as markets eye Fed rate cuts
Shrugging off a lack of data, the US Dollar began last week on firm footing against its peers. Due to cautious trade, the safe-haven ‘Greenback’ managed to capitalise on easing Federal Reserve rate cut bets.
However, following dovish comments from Fed officials, USD began to slip as markets eyed more aggressive policy loosening. Furthermore, US Treasury bond yields declined sharply, piling additional pressure on USD exchange rates.
The latest FOMC minute struck a cautious tone, which prompted the ‘Greenback’ to soften further during the middle of the week. The minutes showed that the Fed had reaffirmed a data-driven approach, leading to a more dovish outlook.
Thursday saw the ‘Greenback’ rebound following these losses. Dip-buying saw investors look to pick up a bargain, with USD’s strength further affirmed by a surprise drop in jobless claims. This showed that the US labour market remains strong, which could allow the Fed more room to keep rates elevated.
However, USD was unable to end the week on a strong note as a slump in US Treasury bond yields weakened it against its peers.
The Fed’s preferred gauge of inflation, the core PCE price index, is set to print on Thursday. The reading is expected to have edged lower in January, which could increase Fed rate cut bets and weaken USD.
Euro undermined by downbeat economic outlook
Concerns over the state of the German economy weighed on the Euro at the start of last week’s session. Bundesbank, the German central bank, commented that the country would likely fall into a technical recession at the start of 2024, and warned of a bleak economic outlook.
While a light data calendar kept movement in the common currency limited on Tuesday, it remained underpinned by its negative correlation to a falling US Dollar.
Data remained few and far between on Wednesday for the Euro, preventing it from trading with a clear direction against its rivals.
Choppy trade then struck the common currency on Thursday, following the latest preliminary PMIs. While the EU services PMI exceeded estimates, manufacturing activity showed signs of softening further. With the Eurozone’s economic outlook growing more uncertain, investors shied away from EUR.
The Euro then wavered at the end of the week, amid mixed German economic data. While the latest Ifo business sentiment index showed improving morale in February, businesses still believe the bloc’s largest economy is heading for a recession.
Looking ahead, the latest EU inflation data is due to print on Friday. Both core and headline rates are forecast to have cooled in February, which may weaken the common currency.