US dollar skyrockets amid hotter-than-forecast inflation
The safe-haven US dollar opened last week’s on the defensive, as an increasing appetite for risk saw the ‘greenback’ slump to a two-week low against some of its rivals. Additionally, a decline in US Treasury yields served to further stifle USD’s movements.
However, with risk appetite souring later in the session, the US dollar’s losses were cushioned amid a move towards safer currencies.
On Wednesday USD rallied as both headline and core inflation beat forecasts. Headline inflation jumped to 3.5% in March, compared to 3.2% in the previous month. Meanwhile core inflation held steady at 3.8%, rather than easing as forecast.
Stubborn US inflation served to snuff out any hopes that the Federal Reserve would begin lowering interest rates in June, as markets significantly dialled back their interest rate cut expectations.
After reaching a five-month high, a spell of profit taking saw USD retreat slightly, as investors sought to cash in on the currency’s upside. In addition to this, an improving market mood further stymied the ‘greenback’ throughout Thursday’s session.
However, USD managed to end the week on a strong note, as deferred rate cut bets continued to boost the ‘greenback’ against its rivals.
Looking ahead, the latest American retail data could spark USD volatility this afternoon. With retails sales due to have slowed notably in March, falling to 0.3% from February’s 0.6%, decelerating consumer activity could weigh on USD’s recent winning streak.
Pound stumbles amid lacklustre growth
The pound strengthened against some of its safe-haven peers as the week opened, as an improving risk for appetite lifted the increasingly risk-sensitive currency.
A data-light calendar in the UK saw much of the same in the following sessions, as market risk dynamics primarily drove GBP exchange rates.
On Thursday, however, hawkish commentary from Bank of England (BoE) policymaker Megan Greene saw GBP attract investor support.
Greene argued that stubborn services inflation in the UK may steer the central bank towards more restrictive policy in the coming months, briefly lifting Sterling against its rivals. However, Greene’s assertions later fell flat, as firm expectations of a June rate cut saw investors ultimately favouring GBP’s rivals.
The release of the UK’s latest GDP report then soured Sterling sentiment amid weaker-than-forecast growth. Printing at 0.1%, lacklustre growth off the back of last year’s mild recession indicated ongoing economic fragility, underwhelming investors as the week drew to a close.
On Wednesday, the UK’s latest inflation data is due for release. Due to have cooled to 3.1% in March, will ramped up BoE rate cut bets sink Sterling?
Euro slumps following ECB rate hold
The euro was volatile on Monday amid mixed German releases. A notable slump in exports indicated ongoing economic weakness in the export-heavy German economy, while strong industrial production figures served to cushion EUR’s losses.
A lack of macroeconomic releases mid-week then left the common currency to trade without a clear direction.
EUR exchange rates then tumbled on Thursday following the European Central Bank’s (ECB) decision to hold interest rates at 4.5% for a sixth consecutive time. Forward guidance from the central bank paved the way for a June rate cut, with ECB President Christine Lagarde observing that it could be ‘appropriate’ for the central bank to promptly begin its unwinding cycle.
The latest German inflation data then showed a notable cooling in March to 2.2% on Friday. Rapidly easing inflation in the Eurozone’s largest economy placed further pressure on the common currency, as ramped up ECB rate cut bets ultimately stifled the euro as the week drew to a close.
On Tuesday, the German ZEW economic sentiment index is due for release. Forecast to rise in April to 35.1, up from last month’s 31.7, an improving outlook may lift the euro from its recent lows.