Pound pressured by dovish BoE comments
The pound began last week’s session in mixed form, as a lack of impactful data left it to be driven by market risk dynamics.
Slowing wage growth and rising unemployment in February then pressured Sterling on Tuesday. However real earnings were found to be outpacing inflation, hitting a two-and-half year high. This allowed GBP to remain afloat.
GBP exchange rates started to rise on Wednesday as UK inflation printed above expectations in March, prompting investors to readjust their interest rate cut bets. However, these gains were quickly undermined by dovish comments from Bank of England (BoE) Governor Andrew Bailey, who suggested inflation would see a ‘strong drop’ in April.
A lull in economic data releases then kept the pound rangebound on Thursday, as Bailey’s dovish remarks continued to sap sentiment.
The end of the week saw the pound drop against its peers, following dovish comments from BoE Deputy Governor Dave Ramsden. In a speech, he stated he was confident that UK inflation would fall close to 2% in April, reinforcing BoE rate cut bets and denting Sterling.
Tomorrow, the UK’s preliminary services PMI reading is due to print. If this shows softening activity in April as forecast, the pound could weaken against its peers.
US dollar wavers amid shifting market mood
After a sluggish start last week amid relief that tensions in the Middle East appeared to be cooling, the US dollar ticked higher on the back of forecast-beating US retail sales data.
The ‘greenback’ then consolidated its gains during Tuesday’s anxious session. However, it was unable to press its advantage, despite hawkish comments from Federal Reserve Chair Jerome Powell.
Demand for the safe-haven US dollar began to fade on Wednesday, as risk appetite began to recover across markets.
USD then recovered on Thursday, rising against its peers. Due to an uptick in US Treasury bond yields, the ‘greenback’ strengthened as investors adjusted their Fed rate cut bets to account for less aggressive rate cuts.
Friday saw the US dollar trend lower, amid a cautiously upbeat market mood. Signs of cooling tensions in the Middle East prompted investors to favour more risk-sensitive currencies.
Thursday brings the release of the latest US GDP figures, reflecting economic growth in the first quarter of 2024. Economists estimate that the US economy grew by 2.5% on a quarterly basis, which may boost the ‘greenback’.
Euro dampened by June rate cut bets
The euro began last week on poor footing, despite a recovery in Eurozone industrial production in February. European Central Bank (ECB) policymakers signalled a June rate cut was likely, denting EUR.
The German ZEW economic sentiment index then increased for the ninth-consecutive month, lifting EUR on Tuesday. With optimism continuing to increase in the Eurozone’s largest economy, investors cheered the upbeat news.
However, confirmation that Eurozone inflation cooled in March dented EUR on Wednesday. Although, these losses were offset by a weakening US dollar due to their negative correlation.
Expectations of a June rate cut continued to weigh on EUR during Thursday’s session, as ECB Vice President Luis de Guindos outlined its likelihood. If inflation continued to cool, he commented, the bank would begin to cut rates at its next meeting.
Friday saw EUR tick higher, in the wake of hotter-than-expected German PPI. As this could indicate sticky inflation in Germany, investors adjusted their bets on rate cuts from the ECB.
The latest Eurozone services PMI is due to be released tomorrow. The preliminary reading for April is forecast to show an uptick in activity, which could strengthen the euro.