Pound plummets as BoE opens door to rate cuts
The pound began last week’s session on wobbly ground, as a lack of UK economic data left Sterling listless. Furthermore, anticipation began to build ahead of the Bank of England’s (BoE) interest rate decision, further muting GBP.
This continued through Tuesday’s session, as investors continued to deliberate over the BoE’s path forward. The expectation that the central bank may be among the last to cut rates underpinned the pound against its peers.
The latest consumer price index printed below forecasts on Wednesday, prompting Sterling to slide. Headline CPI cooled to 3.4% in February, prompting renewed BoE rate cut bets.
The BoE kept interest rates unchanged as expected, but its voting showed that no policymakers were in favour of rate hikes. This prompted Sterling to plunge as it marked a shift towards imminent policy loosening.
Dovish comments from BoE Governor Bailey reinforced GBP’s losses on Friday, as he noted that a rate cut was now ‘in play’ at future meetings.
This week, the pound’s data calendar is much less packed. Later this morning, the latest Confederation of British Industry’s distributive trades data is due to print. In March, retail sales are forecast to have deteriorated which could unsettle GBP exchange rates.
US dollar seesaws amid shifting Fed rate cut bets
Rising US Treasury bond yields saw the US dollar begin last week on firm footing, despite a cautiously upbeat market mood.
Over the course of Tuesday, the ‘Greenback’ relinquished these gains as trading conditions continued to improve. Additionally, anticipation for the Federal Reserve’s interest rate decision continued to grow, tempering USD.
Although the Fed left rates unchanged, as markets expected, Fed Chair Jerome Powell indicated that robust data would not prevent rate cuts. This prompted USD to sink, as investors began to bet on when the first cut would be.
However, dip-buying allowed USD to regain its losses, as it may have entered oversold conditions following the sell-off. Additionally, jobless claims printed below forecasts, suggesting a healthy employment market.
Friday saw the US dollar end the week on a strong note, as markets continued to adjust their Fed rate cut bets.
The Fed’s preferred inflation gauge is due to print at the end of this week, and could boost the US dollar. February’s core PCE price index is forecast to have held at 2.8%, which may further delay rate cut expectations.
Euro pressured by ECB rate cut bets
Over the previous weekend, European Central Bank (ECB) policymaker Hernandez de Cos indicated a June rate cut, which saw the euro start the week on the back foot.
EUR continued to tick lower through Tuesday, despite the latest ZEW economic sentiment index outpacing forecasts. While sentiment appeared to brighten, it was predominantly fuelled by hopes of looser monetary policy from the ECB.
Speculation continued to grow over a string of rate cuts from the central bank, hampering the euro in mid-week trade. This was furthered by declining German PPI, and a dovish speech from ECB President Christine Lagarde. She commented that the bank could soon unwind its restrictive policy.
Stronger-than-expected services data failed to support the euro on Thursday. Although the sector’s preliminary PMI for March indicated improving activity, a climbing US dollar undercut EUR due to their negative correlation.
ECB rate cut bets continued to blight the euro on Friday, overriding an above-forecast increase in German business sentiment in March.
Looking ahead, the euro could see volatile trade this week upon the release of impactful German data. Unemployment is forecast to have held at 5.9% in March, which could suggest stability in the labour market and underpin EUR exchange rates.