Pound underpinned by diminished BoE rate cut bets
The pound (GBP) began the week on a muted note, due to bank holiday market closures.
On Tuesday, Sterling continued to waver despite stronger-than-expected distributive trades data from the Confederation of British Industry (CBI). The CBI found that retail trade improved in April, but the news was undercut by signs of easing inflationary pressures.
Midweek trade saw the pound exposed to global risk dynamics, which prompted the increasingly risk-sensitive currency to struggle. However, Bank of England (BoE) rate cut bet adjustments cushioned Sterling from steep losses.
The expectation that the BoE will no longer pursue a rate cut in June kept GBP afloat on Thursday. Following the cancellation of the central bank’s public speeches ahead of the UK election, markets priced in no change to interest rates.
The end of last week saw GBP undermined by prolonged lack of impactful macroeconomic data. This kept the pound adrift, despite fluctuations in risk appetite.
This week, domestic data remains scarce. Between a light calendar and no central bank guidance, Sterling may struggle to find its footing.
US dollar rocked by easing inflation
Optimistic trading conditions saw the US dollar (USD) begin last week on the defensive. However, subsequent comments from a Federal Reserve policymaker allowed it to claw back some losses, as they indicated another rate hike could be possible.
This likely instigated a sharp rise in US Treasury bond yields, which supported the ‘greenback’ in the middle of the week. Upbeat consumer confidence data further underpinned USD exchange rates.
However, a revision to first quarter US GDP scuppered the ‘greenback’. The second estimate of US’ latest GDP printed at 1.3%, beneath initial readings of 1.6% and a clear slowdown from the previous quarter’s 3.4% growth.
The end of last week saw the ‘greenback’ endure volatile trade. Initially, a drop in the monthly core PCE price index prompted USD to weaken sharply. However, the annual rate held steady at 2.8%, which allowed the US dollar to regain its footing.
US labour data is likely to be the focus for USD investors this week. While the latest JOLTs job openings are expected to show a fall in April, non farm payrolls are expected to have remained weak in May. This could prompt fresh volatility for USD if it stokes Fed rate cut bets.
Euro buoyed by rising inflation
The euro (EUR) began last week on the backfoot, following dovish remarks from European Central Bank (ECB) policymakers.
The majority of ECB officials have now signalled a June rate cut is all but certain, with policymaker Klaas Knot being the latest to add his voice to the chorus on Tuesday. However, hotter-than-expected German Producer Price Inflation muddled the picture.
German inflation data for May also accelerated. This lifted the euro against its peers by suggesting that a June rate cut may be a one-off.
Thursday saw the common currency lack direction, despite Eurozone unemployment falling to a record low of 6.4% in April.
However, EUR managed to end the week on positive footing, as the latest inflation figures for the bloc beat forecasts. Headline inflation accelerated from 2.4% in April to 2.6% in May, but its gains were trimmed by a volatile market mood.
This week, the ECB is due to deliver its latest interest rate decision. While a 25bps cut is expected, the question is whether or not the central bank will continue to loosen policy thereafter. If its forward guidance rings dovish, the euro may slump.