Pound reaches multi-month high as market pare BoE rate cut bets
The pound trended broadly higher through the start of last week amid a sense of UK economic optimism.
Expectations that the Bank of England (BoE) BoE may pursue a less aggressive monetary unwinding cycle than that of other major central banks also saw Sterling edge higher against its rivals.
On Wednesday, the UK’s government’s latest borrowing figures rose significantly more than forecast, initially undermining the pound. Signs of a ‘black hole’ in public finances reinforced concerns that UK Chancellor Rachel Reeves could announce significant tax rises in her Autumn Budget.
In the second half of the week GBP jumped against the majority of its peers following a stronger-than-forecast set of UK PMIs, as the surprisingly robust figures further tempered BoE rate cut bets.
As the week neared an end, BoE Governor Andrew Bailey’s signalled that the bank would need to be ‘cautious’ in the coming months, with signs of divergence between the UK and US central banks boosting Sterling sentiment.
This week, high-impact UK data is in short supply, which could pull the Confederation of British Industry’s (CBI) distributive trades report into focus. Could signs of continually weak UK consumer activity hamper GBP exchange rates?
US dollar tumbles amid rising Fed rate cut bets
The ‘greenback’ touched a fresh one-year low against some of its peers last week amid a dovish consensus from Federal Reserve policymakers.
This kicked off with policymaker Mary Daly’s calls for a gradual series of interest rate cuts on Monday, leaving USD to stumble out of the gate.
The US dollar continued to retreat through Wednesday’s session, with the currency’s losses initially being triggered by a startling downwards revision to US non farm payrolls between April 2023 and March 2024.
Additionally, the publication of the Federal Reserve’s latest policy meeting minutes saw USD dip further, as the release revealed that a ‘vast majority’ of policymakers favoured September for the Fed’s initial rate reduction.
An unexpected rise in the latest US services PMI allowed the ‘greenback’ to recoup some of its losses on Thursday, as a cautious market sentiment underpinned USD.
However, as the week drew to a close, Fed Chair Powell’s speech at the Fed’s annual Jackson Hole symposium saw USD tumble.
The senior rate-setter signalled that the bank will more than likely begin its unwinding cycle next month, with markets also betting the US central bank will pursue a more aggressive policy-easing cycle than previously expectation.
Coming up, the core PCE price index is due for release this week. As the central bank’s preferred gauge of inflation, could stubborn US price pressure lift the US dollar if it triggers a slight pull back in Fed rate cut bets?
Euro supported by USD weakness
The safe-haven euro (EUR) struggled to attract investor support last Monday amid an increasing appetite for risk and a lack of fresh Eurozone data.
On Tuesday, the Eurozone’s latest Eurozone consumer price index confirmed that inflation in the bloc accelerated in July, causing markets to question whether the European Central Bank (ECB) could avoid cutting interest rates next month.
However, a prevailing risk-on mood sapped demand for the safe-haven currency, offsetting EUR’s upside potential.
Mid-week, EUR benefited from its negative trading relationship with a weakened US dollar, enabling the common currency to climb higher against some of its rivals.
The Eurozone’s latest preliminary PMIs later then saw EUR relinquish its previous gains on Thursday.
Despite better-than-forecast services growth this month, analysts noted that the expansion was largely due to the Olympics in France, and therefore unlikely to continue in the coming months.
Meanwhile, growth in the bloc’s manufacturing sector slumped to a fresh eight-month low in August.
On Friday, EUR stumbled as upbeat trade permeated global markets. However, a tumbling USD lent the common currency modest support against some of its peers.
Looking ahead, the bloc’s latest inflation data is due for release on Friday. Could cooling price pressures across the Eurozone boost ECB rate cut bets, thereby denting the single currency?