Pound rallies as UK inflation outpaces expectations
The pound (GBP) managed to begin last week on a positive note, despite mixed commentary from Bank of England (BoE) Deputy Governor Ben Broadbent. While he signalled a possible summer interest rate cut, he stated policymakers were wary of cutting interest rates too soon.
Then, Sterling traded in a wide range during Tuesday’s session. The International Monetary Fund (IMF) upgraded its UK growth forecasts, but also predicted two to three rate cuts from the BoE.
Hotter-than-expected inflation saw the pound surge in mid-week trade. In April, the UK’s headline inflation rate printed at 2.3%, above estimations of a 2.1% reading. This propelled GBP exchange rates to multi-month highs as the odds of the BoE cutting rates in June collapsed.
On Thursday, news of slowing growth in the UK services sector during May weighed on the pound. However, a surprise return to growth for the UK manufacturing sector cushioned GBP’s losses.
The end of last week saw GBP undermined by a slump in retail sales. In April, sales dropped by 2.3%, however, a risk-positive market mood tempered Sterling’s losses.
This week, an absence of impactful data releases is likely to see UK election speculation drive movement in the pound. Any political turbulence could negatively impact GBP exchange rates.
US dollar seesaws amid signs of hawkish Fed shift
Hawkish remarks from multiple Federal Reserve policymakers saw the US dollar (USD) begin last week’s session on firm footing.
However, USD was unable to maintain its momentum on Tuesday due to a lull in data releases. This saw the currency waver against most peers.
The latest FOMC meeting minutes bolstered the ‘greenback’ on Wednesday. The minutes showed that the Fed was open to further interest rate hikes if inflationary pressures persist, leading to a trimming of Fed rate cut bets.
While the US dollar initially weakened on Thursday, a stronger-than-expected preliminary services PMI prompted a recovery.
The end of the week saw the safe-haven ‘greenback’ struggle to attract support due to an improving market mood. However, its losses may have been cushioned by a surprise rise in durable goods orders in April.
Thus far this week, market closures in observance of Memorial day have kept the US dollar level against its peers.
The US dollar could rally at the end of the week, following the release of the latest core PCE price index. The Fed’s preferred inflation gauge is expected to have held at 2.8% in April, which could delay rate cut bets and boost USD.
Euro mixed amid rising ECB rate cut bets
The euro (EUR) wavered at the start of last week, as Eurozone data was in short supply.
On Tuesday, EUR exchange rates came under pressure in the wake of the latest German producer price inflation reading. In April, PPI fell by 3.3%, more than the expected 3.2% cooldown. As producer prices often filter through to consumer inflation, this sparked renewed bets on a June rate cut from the European Central Bank (ECB).
However, a lack of data saw the euro falter in mid-week trade. While a risk-averse market mood yielded some support, a rising US dollar limited the single currency’s upside potential.
Mixed preliminary PMIs weighed on the common currency on Thursday. In May, the Eurozone’s service sector showed strong activity, but softening expansion. Furthermore, the bloc’s manufacturing sector remained in contraction.
Rising ECB interest rate cut bets muted the euro last Friday, as markets continued to pencil in a June interest rate cut.
At the start of this week, dovish comments from ECB policymakers have kept the common currency week, as a June cut looks more and more likely.
The latest Eurozone inflation data is due to print on Friday, and is forecast by economists to have accelerated in May. If this prints accurately, the euro could grind higher if it weakens ECB rate cut bets for the second half of the year.