Pound trends higher on hot CPI
A data-light calendar saw the pound trade without a clear direction at the start of last week. Dovish commentary from Bank of England (BoE) policymaker Swati Dhingra also prevented GBP from climbing higher, as she stated that ‘now is the time’ to begin lowering interest rates.
Additionally, investors appeared largely reluctant to place any aggressive bets on Sterling ahead of the UK’s latest batch of inflation data.
On Wednesday, GBP strengthened following a hotter-than-forecast consumer price index, as Sterling neared a one-year-high against the US dollar.
Both headline and core inflation held steady in June, while services inflation remained uncomfortably high, printing at 5.7% last month. Signs of stubborn UK disinflation led to a trimming of August interest rate cut bets, lifting GBP against its rivals.
Sterling then retreated from its recent highs heading into the latter part of the week following the release of the UK’s latest jobs data. Persistently high UK unemployment and cooling wage growth indicated that the BoE could have less scope to defer monetary loosening than June’s inflation data may have suggested, which revived August rate cut bets and weighed on GBP.
On Friday, a sharper-than-forecast decline in UK retail sales last month left GBP to extend these losses, ending the week on a sour note. However, analysts speculated that wet weather and pre-election uncertainty in the UK were largely to blame for reduced footfall in June, cushioning Sterling’s downside.
Going forwards, the UK’s latest preliminary PMIs are due for release this week. Could expanding service sector activity bolster GBP?
US dollar volatile amid fluctuating Fed rate cut bets
The US dollar initially wavered last week as the attempted assassination of US Presidential hopeful Donald Trump infused US markets with volatility. Meanwhile, tepid commentary from Federal Reserve Chair Jerome Powell offered the ‘greenback’ little support, as ramped-up Fed rate cut expectations limited USD’s upside potential.
On Tuesday, an upward revision to May’s retail sales in the US enabled USD to garner some investor support, despite flatlining growth in June.
USD edged higher on Wednesday afternoon following the latest US industrial production data. The release showed a higher-than-expected level of output in June, while an upward revision to May’s figures further lifted USD sentiment.
A sharper-than-forecast rise in the latest initial jobless claims data on Thursday weighed on USD, signalling ongoing slack in the US labour market. However, USD was able to resist significant losses, and later rebounded from recent lows as the session neared an end. After a brief stint of overselling throughout the week, largely spurred by exaggerated Fed rate cut bets, a recovering USD climbed higher.
On Friday, rising US Treasury bond yields and a gloomy market sent underpinned USD’s recovery as the week neared its end.
Looking ahead, the latest US GDP data is forecast to report an acceleration of economic growth in the second quarter, which could see the ‘greenback’ rally.
Euro wavers as ECB keeps rates on hold
The euro wavered on Monday despite better-than-forecast industrial production data. While activity slumped less than forecast, a 0.6% decline in factory activity in May weighed on the common currency.
On Tuesday, the latest German ZEW economic sentiment index reported morale fell for the first time in a year in the Eurozone’s largest economy. This further undermined EUR exchange rates, highlighting ongoing economic pessimism across the bloc.
Confirmation that Eurozone inflation had cooled in June initially pressured EUR mid-week. However, due to the euro’s negative correlation with a weakening US dollar the single currency climbed higher later in the session.
The European Central Bank (ECB) enacted a widely anticipated interest rate hold on Thursday, keeping rates unchanged at 4.25%. Markets interpreted the move as widely dovish, with ECB President Christine Lagarde stating that the central bank remained ‘wide open’ to a September rate cut.
Coming up, the Eurozone’s latest PMIs are due for release this week. Signs that activity in the private sector strengthened in July could lend the euro some much needed support.