Pound seesaws amid shifting BoE rate cut bets
The pound tumbled at the beginning of last week, as investors began to price in an August interest rate cut from the Bank of England (BoE). 50bps of cuts were expected, which caused GBP to hit multi-month lows.
BoE Chief Economist Huw Pill warned against cutting rates too quickly on Tuesday, which subsequently boosted the pound. Furthermore, the UK’s service sector PMI printed above expectations, yielding an additional tailwind.
Mixed data from the Confederation of British Industry (CBI) then prompted Sterling to waver in mid-week trade. While business confidence sharply improved, April’s industrial orders slumped significantly.
Investors then began to readjust their bets on BoE rate cuts on Thursday, underpinning the pound. However, GBP saw its gains trimmed amid news of slumping retail sales from the CBI.
The pound then ended the week on a wobbly note, amid a lack of impactful macroeconomic data releases.
With GBP data releases remaining few and far between, we may see the pound take its cues from UK political developments, with local elections and rumours of a summer general election potentially infusing some volatility into Sterling.
US dollar fluctuates amid sticky inflation
With the market mood on an uptick on Monday, the safe-haven US dollar struggled to attract support from investors.
The latest preliminary PMI readings then missed forecasts, which prompted a further pullback in USD exchange rates. In April, US business activity showed a surprise slowdown, prompting concerns over the US economy.
US Treasury bond yields managed to grind higher on Wednesday, which allowed the US dollar to recoup some losses.
The latest US GDP figures then disappointed investors on Thursday, rocking USD exchange rates. Growth slowed from 3.4% to 1.6% in the first quarter of 2024. While this initially soured the market mood prompting the US dollar to spike, its gains quickly were reversed.
Friday saw the US dollar recover, amid a hotter-than-expected core PCE price index print. The Federal Reserve’s preferred inflation gauge held at 2.8%, reigniting a pullback in Fed rate cut bets and lifting USD.
Wednesday brings the latest interest rate decision from the Federal Reserve. While markets expect no change in rates, close attention will be paid to any forward guidance. If the Fed remains coy about interest rate cut timings, USD could rally.
Euro undermined by ECB rate cut bets
The euro began last week on poor footing, as consumer confidence in the Eurozone missed forecasts. Additionally, risk-on trade weighed on the safer common currency.
Tuesday saw EUR gather some support in the wake of stronger-than-expected services data. April’s preliminary PMI showed an acceleration in sector growth but was undercut by further contractions in the manufacturing sector.
Despite positive German business climate data, the prospect of upcoming interest cuts from the European Central Bank (ECB) capped the euro in mid-week trade.
ECB Policymakers then delivered hawkish remarks on Thursday, stating that the pace of rate cuts may be slower than markets expect. This served to cushion the euro, but the remarks largely went ignored.
The end of the week saw EUR weaken across the board, as bets increased that the ECB would be the first central bank to cut rates.
The latest Eurozone GDP and inflation data is due to print tomorrow. With the bloc’s economy forecast to have grown by 0.1% in the first quarter of 2024, and inflation expected to remain sticky, EUR may climb.