Pound stumbles on dovish BoE
The pound traded without a clear direction against its major rivals at the start of last week, with fresh UK data in short supply. A risk-averse market mood dragged on the increasingly risk-sensitive currency later in the session, leaving Sterling to fall flat.
A data-light session on Tuesday saw GBP falter, as investors appeared hesitant to place any aggressive bets on Sterling ahead of the UK’s latest consumer price index (CPI) and subsequent Bank of England (BoE) monetary policy meeting.
The release of the Britain’s latest inflation data on Wednesday then lent GBP some modest support against its rivals. While headline inflation cooled in June, dipping to the central bank’s 2% target rate, stickier-than-forecast services inflation indicated that domestic price pressures remain elevated. However, the pound later retreated, as ramped up expectations of an August interest rate cut hampered GBP exchange rates.
On Thursday, the BoE delivered a widely expected hold on UK interest rates, keeping them at a sixteen-year high of 5.25%. However, the bank noted its decision was ‘finely balanced’ reinforcing projections that monetary unwinding may occur in the second quarter of 2024, leaving the pound to fall by as much as a third of a cent against its US counterpart.
Some mixed releases on Friday then saw GBP fluctuate as the week drew to a close. UK retail sales rebounded more than forecast in May, as the latest British manufacturing PMI rose to a three-month high. However, a worse-than-expected services PMI seemed to offset Sterling’s upside potential, as a slowdown in the vital sector deterred investor interest.
With the UK’s finalised GDP figures due for release this week, confirmation that the British economy has returned to a period of growth may boost Sterling sentiment.
US dollar rebounds amid warming services sector
The US dollar enjoyed some modest support as Monday’s session opened, as a risk-off market sentiment boosted the safe-haven currency against its more risk-sensitive peers. However, dialled up Federal Reserve interest rate cut bets weighed on USD as the session neared an end.
While policymakers have continued to strike hawkish in recent weeks, cooling US inflation pulls the likelihood of a September interest rate cut into question, with the CME FedWatch Tool now pricing in a nearly 70% chance of such occurring.
On Tuesday, USD retreated further following the latest American retail data. Retail sales rose by a meagre 0.1% in May, rather than rising by 0.2% as forecast. Additionally, a downward revision to April’s sales growth reading further soured USD sentiment.
The ‘greenback’ was then largely subdued on Wednesday amid a lack of fresh releases and a fluctuating market sentiment.
In the latter half of the week, initial jobless claims in the US remained elevated at 238,000, placing the US labour market under scrutiny once again. However, an uptick in US Treasury yields appeared to cushion USD’s downside as the session progressed, though left the ‘greenback’ largely subdued.
A strong set of PMIs on Friday then lent USD support as the week drew to a close. The vital services index rose to 55.1, reaching its highest level since April 2022. The upbeat release indicated that the Fed may still operate restrictive policy with some additional leeway this year, amid continually robust economic activity.
Looking ahead, the latest US core PCE price index is due for release on Friday. As the Fed’s preferred gauge of inflation, could further cooling see USD tumble amid ramped up rate cut bets?
Euro slumps amid economic pessimism
The euro initially edged higher last week following some hawkish commentary from the European Central Bank’s (ECB) Chief Economist Philip Lane. Lane indicated that the central bank may defer further interest rate cuts until later in the year, suggesting that markets could have speculated on an overly aggressive monetary unwinding cycle from the ECB.
However, political uncertainty surrounding France’s looming snap election served to cap EUR’s upside potential, as markets expressed concerns over the growth of the far-right.
A lacklustre ZEW economic sentiment index in Germany then left the common currency to face headwinds on Tuesday, with the index falling below market projections and rising only modestly in June.
A data-light session mid-week saw EUR largely subdued against its rivals as pre-election concerns were once again pulled into focus. Meanwhile, a cautiously upbeat market mood further stymied investor interest in the safe-haven single currency.
The release of the latest German producer price index (PPI) on Thursday then saw EUR face additional headwinds, as the index declined for an eleventh consecutive month. Continually easing produce prices saw reinforced market projections that the ECB will likely continue its unwinding cycle in the coming months, leaving ramped up rate cut bets to weigh on the common currency once again.
A worse-than-forecast batch of preliminary PMIs in the Eurozone dented EUR on Friday. Slowing activity across both the manufacturing and services sectors pointed to an ongoing period of underlying economic weakness across the Euro bloc, souring EUR sentiment as the week drew to a close.
This week sees the publication of several economic sentiment indicators in the Eurozone. The most notable may be the Eurozone’s economic sentiment index, due for release mid-week. Could a renewed sense of economic optimism in the Euro bloc boost the common currency?