Pound retreats on UK economic pessimism
The pound (GBP) initially wavered last week as UK markets closed in observance of the British bank holiday.
On Tuesday, GBP investors mostly shrugged off an unexpected decline in the Confederation of British Industry’s (CBI) latest distributive trades reports. Meanwhile, markets appeared largely unmoved by UK Prime Minister Keir Starmer’s warning of a ‘painful’ Autumn Budget this year.
Instead, GBP clung onto its recent gains as markets recalled the latest Bank of England (BoE) commentary. Governor Andrew Bailey’s belief that the bank must remain ‘cautious’ on its forward path served to reinforce speculation that the BoE may deliver a less aggressive policy-easing cycle than that of other major central banks, thereby limiting GBP’s downside.
Mid-week, a souring market sentiment coupled with some light profit taking sapped appeal for the increasingly risk-sensitive currency, following Sterling’s strong appreciation in recent weeks.
Thursday saw GBP slump further as investors looked towards UK Chancellor Rachel Reeve’s looming Autumn Budget. Growing concerns of a ‘black hole’ in UK public finances discouraged investor interest in the pound, as investors mulled over potential tax rises across Britain in the months ahead.
As the week drew to a close, a lack of fresh UK data saw GBP trade without a clear direction against its peers.
Looking ahead, confirmation of robust UK services activity in August may see Sterling recoup its recent losses this week.
US dollar firms amid market correction
After touching a fresh two-year low against its UK counterpart, the US dollar (USD) staged a modest recovery last week, as the ‘greenback’ exited oversold conditions.
After initially stumbling on Tuesday amid cautiously upbeat market sentiment, USD’s losses were cushioned by an unexpected rise in the latest CB consumer confidence index.
On Wednesday, USD rallied amid a cautious market mood, due to its safe-haven status. Meanwhile, as investors sought to ‘buy the dip’ following an extended period of USD weakness, the ‘greenback’ edged higher against its rivals.
The US dollar rose further on Thursday following a stronger-than-forecast US GDP release. The data revealed that growth in the second quarter unexpectedly rose to 3%, amid an acceleration in consumer spending.
As the week neared its end, news of cooling US inflation fell largely by the wayside as signs of increased consumer spending served to quell recent US recession fears, while also softening speculation that the Federal Reserve could enact a series of aggressive rate cuts this year.
Coming up, an influx of high-impact US jobs data is due for release this week, with the key US non-farm payrolls due out on Friday. News of strengthening US employment soothe concerns of a deteriorating American labour market, and lift USD this week.
Euro undermined by ECB rate cut bets
The euro (EUR) stumbled out the gate last week as Germany’s latest Ifo business climate indicator fell to its lowest level since February.
However, an ongoing spell of USD weakness supported EUR, due to the pairing’s negative trading relationship.
On Tuesday, confirmation that the Eurozone’s largest economy had shrunk by 0.1% during the second quarter soured EUR sentiment, while an unexpected downtick in German consumer confidence further undermined EUR exchange rates.
On Wednesday, EUR remained on the back foot as its US counterpart ticked up from recent lows.
EUR retreated further on Thursday as Germany’s latest consumer price index cooled more than forecast, dipping below the European Central Bank’s (ECB) 2% target rate to a weaker 1.9% in July. This bolstered the case for a September rate cut by the ECB, thereby dampening EUR exchange rates.
On Friday, the wider bloc’s inflation release dipped to 2.2%, from a previous 2.6%. Following news of rapidly cooling German price pressures, the data served to reinforce speculation that the bank could lower interest rates once again at its meeting next month.
However, signs of continually robust employment in the Euro area appeared to limit EUR’s losses, as the bloc’s unemployment rate unexpectedly fell to 6.4% in July.
Looking ahead, Germany’s latest set of factory data is due for release this week. Could signs of weakness in manufacturing sector prevent EUR from recovering?