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The US dollar was the big gainer in last week's trading.
Data from across the Atlantic caused some significant moves in currency markets last week. The pound lost 1% to the US dollar and half a per cent to the euro, while EUR/USD lost two thirds of a per cent over the course of the week. Both European currencies remain well up against the dollar since the beginning of the month.
The two main causes of the volatility were US inflation and PPI data. UK GDP data also had a part to play, as hopes were boosted that the UK’s recession would prove to be short and relatively painless.
There was a long overdue epiphany of sorts for US markets. Begrudgingly, we might add, and with all the grace of a stropping toddler in a supermarket, traders started to pull back their bets on Federal Reserve cuts this year. Judging by current trends, it now seems the majority expect three rounds of cuts in 2024, down from expectations of between six and seven in January.
Without wishing to editorialise this shift, it’s not exactly rocket science. Jerome Powell has been warning everyone who would listen (evidently fewer people than you’d think) that rates would have to be held higher for longer. Now, backed up by the cold, hard reality of data, markets have finally accepted there was truth to this. That’s good news for anyone making a purchase in US dollars anytime soon.
What’s true for the US seems to be true for the eurozone at the moment. The European Central Bank (ECB) have indicated interest rates won’t be cut before the summer, while on Friday, French inflation surprised to the upside, highlighting the risks of any premature rate cuts.
As we set our sights on another week, there’s the usual stream of macro data to get through, plus a generous dose of political intrigue. Here’s what to look out for this week…
It’s a slightly niche subject, but we’ll be keeping a close eye on interest rate decisions from the Bank of Japan and the Reserve Bank of Australia overnight. Both have been tipped to buck the trend of reducing rates, which has sent both the yen and the Aussie dollar up against their rival currencies this month. Tuesday also features the ZEW Economic Sentiment Index from Germany.
We’ve got our work cut out on Wednesday, the day in which UK inflation data arrives in the morning session. If that wasn’t enough, the Federal Reserve will then make their next interest rate decision in the evening and Jerome Powell will speak at the customary press conference.
We’ll then see the flash (preliminary) read for the German HCOB manufacturing index, before the Bank of England announce their own interest rate decision on Thursday afternoon. UK retail sales and the German Ifo business climate survey round out a busy old week.
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GBP: Watching the votes
The Bank of England are once again expected to hold interest rates at their current levels on Thursday, so we might have to interest ourselves in the voting records of MPC (Monetary Policy Committee) members. The last decision saw a difference in opinion, but it’s thought this one could see policymakers more aligned as the warning lights for inflation stop flashing.
GBP/USD: the past year
EUR: France the canary?
The ECB has been warning of resurgent price pressures. On Friday, France reported inflation had increased to 3% year-on-year in February. It was a small increase, but the eurozone will be hoping France is not the canary in the coalmine for rising inflation.
GBP/EUR: the past year
USD: Back in the black
The US dollar rebounded last week, posting strong gains over the pound and the euro. Whether it can maintain that strength is another question, although it may well benefit from changing interest rate expectations.
EUR/USD: the past year
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