Pound fluctuates amid shifting BoE rate cut bets
Euro undermined by downbeat German data
US Dollar boosted by stubborn inflation
ECB interest rate decision in focus
Pound mixed amid fluctuating BoE rate cut bets
The Pound strengthened against most of its peers at the start of last week as the Confederation of British Industry’s (CBI) latest distributive trade survey beat forecasts.
News of cooling shop inflation on Tuesday then saw GBP retreat, as signs of easing price pressures served to reinforce Bank of England (BoE) interest rate cut bets.
This was followed by commentary from BoE policymaker Catherine Mann on Wednesday, with talks of continually restrictive monetary policy serving to offset the increasingly risk-sensitive Pound’s losses amid a spell of gloomy trade.
The only notable UK data release towards the end of the week was the finalised manufacturing PMI. Confirmation of a sixteenth consecutive contraction in UK factory activity pressured GBP exchange rates amid as the week drew to a close.
Looking ahead, Chancellor Jeremy Hunt’s Spring Budget will likely act as the core catalyst of movement in the Pound this week. Hunt is expected to announce a package of tax cuts in a budget designed to set economic growth in motion which could boost GBP sentiment.
However, lingering concerns that the Treasury lacks enough ‘fiscal headroom’ to enact such cuts could see the budget underwhelm markets.
US Dollar volatile amid waning Fed rate cut bets
The US Dollar faced headwinds as the week opened, following a dramatic slump in US durable goods orders, which declined at the sharpest rate recorded since April 2020.
However, during a bout of gloomy trade, potentially sparked by ongoing shipping disruptions in the Red Sea, the safe-haven ‘Greenback’ recouped its initial losses as Tuesday’s session progressed.
The US Dollar continued to capitalise on risk averse trading conditions, though a downward revision to US GDP in the fourth quarter of 2023 later dented the ‘Greenback’. A brief period of profit-taking further dented exchange rates, leaving USD rudderless in the middle of the week.
A larger-than-forecast rise in US jobless claims the following day reinforced concerns of a loosening American labour market, denting the US Dollar.
Later, the core PCE price index, the Federal Reserve’s preferred gauge of inflation, highlighted persistent price pressures. Dampening Fed rate cut bets and strengthening the US Dollar.
Friday then saw hawkish sentiment conveyed by Federal Reserve policymaker John Williams countered February’s weaker-than-anticipated ISM manufacturing PMI, though the downbeat data release ultimately saw USD slump.
Coming up, US jobs data will be in focus. With the latest non farm payrolls forecast to report a notable slump towards the end of the week, USD could falter amid renewed signs of weak US employment.
Testimony from Fed Chair Jerome Powell may also drive USD movement, with any notably hawkish commentary likely to boost the US Dollar.
Euro (EUR) wavers amid warming inflation
The Euro began last week on a positive note, as hawkish commentary from European Central Bank (ECB) President Christine Lagarde buoyed the common currency. As Lagarde affirmed that the central bank was likely to keep interest rates ‘higher for longer’, EUR garnered investor interest.
Economic pessimism then weighed on exchange rates, as the latest GfK consumer confidence survey showed that economic optimism in the Eurozone’s largest economy remains deeply negative.
Mid-week, the Euro recovered despite thin trading conditions, due to its negative correlation with a stumbling US Dollar.
Cooling German inflation on Thursday then saw markets resize their rate cut expectations, with easing German prompting further bets that the ECB would soon begin to loosen its historically tight monetary policy.
However, Eurozone inflation then beat forecasts, coming in hotter than expected, which served to the offset the previous day’s losses. Stubborn Eurozone inflation left markets speculative over whether the ECB will in actuality be required to maintain restrictive monetary policy over the coming months in order to curb persistent and sticky Eurozone inflation.
Looking ahead, the ECB’s latest interest rate decision will likely be the core catalyst of movement this week for EUR exchange rates. While the central bank is widely expected to keep interest rates at 4.5%, any accompanying forward guidance could drive significant EUR volatility.