Pound pressured by signs of incoming BoE rate cuts
Trade in the pound was muted at the beginning of last week, as bank holiday closures on Monday were followed by minimal data on Tuesday.
Hesitancy began to grow amongst investors too, as markets began to eye the latest interest rate decision from the Bank of England (BoE).
This trepidation, alongside a downbeat market mood, prompted the pound to soften during midweek trade.
While the BoE kept interest rates unchanged, Governor Andrew Bailey supplied a more dovish leaning to its forward guidance. By signalling that the BoE could cut rates sooner than markets anticipate, pressure piled on Sterling.
Despite the UK’s latest GDP data initially yielding strength for the pound, it trimmed its gains over Friday’s session. While the UK economy expanded by 0.6% in the first quarter of 2024, expectations of slow growth in the future negated the positivity.
Tomorrow, the latest batch of UK wage data is due to print. In the three months leading to March, average earnings excluding bonuses are expected to have cooled to 5.9%. This could weigh on the pound as it shows a continued decrease in real terms pay, one of the BoE’s key indicators for inflation.
US dollar seesaws amid signs of labour market slack
Owing to a lull in data releases, the US dollar began last week’s session on the back foot.
This continued into Tuesday’s session, with an uncertain market mood further limiting USD’s scope for gains. Additionally, muddled messaging from Federal Reserve policymakers added additional pressure.
Risk-averse trade on Wednesday saw the safe-haven US dollar gain ground against its peers. This was reinforced by an uptick in US Treasury bond yields.
However, Thursday saw the ‘greenback’ reverse its gains in the wake of the latest initial jobless claims for the week ending 4 May. Claims leapt to an eight-month high, pointing to a slowdown in the US labour market and sparking Fed rate cut bets.
Friday saw the US dollar recover somewhat, as bond yields ticked higher, bolstering support for USD. However, a slump in American consumer confidence limited its upside.
Wednesday brings the latest US inflation data. Headline inflation is expected to have cooled from 3.5% to 3.4% in April. Will this stoke Fed rate cut bets and weaken the ‘greenback’?
Euro struggles as ECB signals June rate cut
The euro strengthened at the beginning of last week, despite a mixed slate of German economic data.
While German factory orders declined, an uptick in German exports and a stronger-than-forecast recovery in Eurozone retail sales lifted EUR.
On Wednesday, a contraction in German industrial production failed to weaken the euro. Due to the 0.4% decline in March beating forecasts, risk-off trading conditions allowed the common currency to tick higher.
Thursday’s session saw the euro weaken against its peers amid increased European Central Bank (ECB) rate cut bets. However, it’s negative correlation with the US dollar allowed it to firm as the latter
These bets were then compounded by dovish ECB meeting minutes, which showed a bias towards a June rate cut. This prompted the euro to slip, and saw it end the week on a downbeat note.
May’s ZEW economic sentiment index for Germany is due to print tomorrow, and is forecast to show an uptick in confidence. If the picture is continuing to improve in the Eurozone’s largest economy, the euro could attract some support.