Pound pressured rising BoE rate cut bets
Trade in the pound was choppy at the beginning of last week. Cautious optimism around the UK economic outlook was offset by increasing bets of a June interest rate cut from the Bank of England (BoE).
Unemployment rose to an eight-month high in March, which prompted Sterling to tick lower during Tuesday’s session.
However, upbeat trading conditions subsequently saw the increasingly risk-sensitive pound garner support in mid-week trade.
Dovish commentary from BoE policymaker Megan Greene undermined Sterling on Thursday. In a speech, Green commented that UK inflation persistence was waning, sparking rate cut bets.
Increased risk appetite then allowed the pound to close the week on a positive note against its safer peers, despite a lack of data.
Wednesday brings the releases of the UK’s latest consumer price index. In April, headline inflation is forecast to have cooled to 2.1%. This could dent the pound as it brings it within touching distance of the BoE’s target, and it likely to cement bets for a June rate cut.
US dollar slips as inflation cools
Due to an absence of data, risk-on trade prompted the US dollar to start last week on the defensive.
USD continued to struggle on Tuesday, in the wake of mixed producer price inflation figures. March’s PPI was revised lower, prompting speculation of softening consumer inflation.
The ‘greenback’ then slipped, as April’s CPI figures reported a cooling of inflation, which boosted bets on Federal Reserve rate cuts.
However, Thursday saw the safe-haven currency manage to recoup some losses, amid a pervasively gloomy market mood. Furthermore, jobless claims showed a week-on-week decline, providing additional cushioning.
As risk appetite increased during Friday’s session, the US dollar receded against its more risk-sensitive peers.
The US dollar could see volatile trade following the publication of the latest FOMC meeting minutes on Wednesday. If the minutes skew more hawkish, inline with recent Fed rhetoric, the ‘greenback’ may strengthen.
Euro supported by upbeat economic data
The euro wavered at the start of last week, due to a lack of macroeconomic data from the Eurozone.
Tuesday saw EUR exchange rates tick higher amid an improving outlook for the German economy. The latest ZEW economic sentiment index found morale improved at a faster pace than expected in May.
On Wednesday, robust industrial production data from the Eurozone strengthened the euro. In March, production rose by 0.6%, as opposed to the anticipated 0.5% reading.
Data releases tapered off on Thursday, which prompted the euro to trade in a mixed capacity. As the US dollar was gaining ground, EUR struggled due to its negative correlation with the ‘greenback’.
Dovish comments from European Central Bank (ECB) policymakers weakened the euro on Friday. Isabel Schnabel conceded that a June rate cut was likely, while Vice President Luis de Guindos stated price pressures were easing.
European Central Bank President Christine Lagarde is due to speak on Wednesday. If she maintains a dovish attitude, the common currency may weaken amid increased rate cut bets. Although positive PMI figures later in the week could provide a boost for the euro.