Pound volatile as BoE lowers interest rates
A data-light calendar saw the pound edge lower at the start of last week, as UK Chancellor Rachel Reeves revealed government plans to lower spending and increase taxes, in hopes of plugging a £22bn ‘black hole’ in public finances, inherited from the previous Conservative government.
However, as Reeves stated that no tax changes would be implemented ahead of the 2024 autumn budget, GBP’s losses were cushioned.
An ongoing lull in UK data then left GBP exposed to losses through the first half of the week as markets braced for the Bank of England’s (BoE) looming interest rate decision.
GBP plunged to multi-week lows on Thursday morning, as firming expectations that the BoE would reduce its base rate left Sterling on the back foot. In the afternoon, the bank delivered a widely anticipated quarter-point rate reduction, lowering interest rates from a sixteen-year high of 5.25% and making its first rate cut since 2020.
However, with only five of the nine voting rate-setters opting for a rate reduction, alongside some hawkish forward guidance, GBP was able to recoup some of its losses as the session neared its end.
On Friday, a speech from BoE Chief Economist Huw Pill lent GBP modest support, as the senior policymaker warned against cutting rates ‘too quickly’ in the coming months.
This week, a lack of notable UK data could see the increasingly risk-sensitive pound left vulnerable to global risk dynamics, with any gloomy trade likely to hamper GBP exchange rates.
US dollar tumbles as Fed rate cut bets soar
The safe-haven US dollar initially strengthened last week as escalating tensions in the Middle East fuelled risk-averse trading conditions.
The ‘greenback’ continued to climb on Tuesday as the latest US JOLTs job openings figures beat forecasts. In addition to this, the latest US consumer confidence index surpassed market projections.
USD held its ground throughout Wednesday’s European trading hours, before sharply plummeting in the evening as the Federal Reserve delivered its latest interest rate decision. While the bank left interest rates unchanged, its forward guidance was largely dovish, with Fed Chair Jerome Powell signalling that a September rate cut is likely.
Thursday saw the ‘greenback’ recoup some of its losses as surmounting geopolitical tensions and concerns of a weakening Chinese economy soured market sentiment once again.
The release of the latest US non farm payrolls report on Friday then saw USD strike multi-month lows against some of its major rivals, with the release significantly falling below forecasts.
Furthermore, the US unemployment rate unexpectedly rose to 4.3% in July. The bleak jobs data confirmed lingering fears that the US labour market is in fact notably cooling off, leading to a further surge in Fed rate cuts as the week drew to a close.
Looking ahead, the ISM services PMI for July is due out on Monday in the US. Should the index signal a return to growth in the vital sector, USD could stage a modest recovery.
Euro buoyed by upbeat GDP figures
The euro faced headwinds on Monday due to its negative correlation with a strengthening ‘greenback’. EUR was further stymied by investor reluctance, ahead of some market-moving Eurozone data due for release throughout the week.
On Tuesday, the single currency strengthened following a better-than-forecast Eurozone GDP print. The bloc’s economy expanded by 0.3%, surpassing market projections of 0.2% throughout the second quarter. Other major Eurozone economies, including France and Italy also reported robust growth. However, EUR’s upside potential was limited, as the German economy, which serves as the Eurozone’s largest, unexpectedly contacted.
The Euro area’s latest inflation data then reported a surprise uptick in inflationary pressures on Wednesday, as the consumer price index rose to 2.6%, rather than easing to 2.4% as forecast. This saw a slight pull-back in European Central Bank (ECB) interest rate cut bets, thereby lifting the common currency.
EUR climbed higher on Friday, supported by its negative correlation with the US dollar.
Coming up, Germany’s latest trade data is due for release this week. Could signs of weakness in the export-heavy economy stymie EUR?