Pound dented by bleak UK economic forecasts
The pound (GBP) initially firmed last week as the increasingly risk-sensitive currency was supported by upbeat market sentiment.
However, these gains swiftly faded as mounting tensions in the Middle East began to erode investors’ risk appetite.
Sterling remained on the defensive in mid-week trade as the UK’s latest manufacturing PMI confirmed the factory sector slipped back into contraction in April.
GBP exchange rates then came under more notable pressure as we entered the second half of the week.
This followed the publication of the Organisation for Economic Cooperation and Development’s (OECD) latest forecasts.
The OECD slashed its UK growth forecast for 2024 from 0.7% to 0.4%, while also warning that the UK will be the slowest-growing G7 country in 2025.
Looking ahead, the Bank of England’s (BoE) latest interest rate decision will be centre stage this week. No policy changes are expected, but the pound is poised to slump if the BoE hints that it is moving closer to its first interest rate cut.
However, any losses could be tempered by the release of the UK’s latest GDP figures at the end of the week. The preliminary figures for the first quarter are expected to report the UK returned to growth after slipping into a recession in the second half of 2023.
US dollar undermined by dovish Fed
The US dollar (USD) stumbled at the start of last week following an apparent FX intervention by the Japanese government as they sort to reverse the recent depreciation of the Japanese Yen (JPY).
A subsequent souring of market sentiment helped the ‘greenback’ to recoup some of these losses, before facing fresh pressure in the middle of the week as the Federal Reserve concluded its latest policy meeting.
While the bank’s decision to keep interest rates on hold was widely expected, USD investors appeared surprised by the dovish tone struck by Fed Chair Jerome Powell in his accompanying press conference.
Further undermining USD exchange rates in the second half of the week was the publication of the latest US non farm payroll report.
The figures showed the US economy only added 175,000 jobs in April, down from 315,000 in March and missing forecasts for a 243,000 increase. The weaker-than-expected data revived bets the Fed could deliver multiple rate cuts in 2024.
USD investors may look to upcoming speeches by several Fed policymakers for fresh impetus this week. Expect to see the US dollar come under additional pressure if they echo the dovish tone struck by Powell last week.
Euro underpinned by positive Eurozone GDP
The euro (EUR) opened last week’s session on the defensive as it was undermined by a softer-than-expected German inflation print.
The single currency was quick to rebound, however, with EUR investors welcoming the Eurozone’s latest GDP and inflation figures.
Stronger-than-expected growth in the first quarter of 2024, coupled with a robust inflation print, supported the euro as it prompted EUR investors to reprice their expectations for interest rate cuts from the European Central Bank (ECB) in the second half of the year.
Thin trading conditions in the euro due to the close of most of the Eurozone for May Day subsequently weighed on EUR exchange rates.
However, the euro was quick to bounce back in the second half of the week, with the single currency being strengthened by its negative correlation with the US dollar.
Germany’s latest industrial figures may act as a headwind for the euro this week. A shock slump in factory orders in March is expected to be followed by a decline in industrial production over the same period. Will signs that a key part of Germany’s economy is slowing act as a headwind for the euro?