Fears of recession restrains the Pound

The Pound (GBP) experienced a strong rebound throughout the week following an initial setback. The manufacturing sector's confirmed contraction exerted pressure on Sterling, triggering concerns among investors about potential economic difficulties. The Bank of England's persistent tightening measures, which raised fears of an impending recession, further restrained the strength of the Pound.

Fortunately, a favorable shift towards riskier assets in the market provided some momentum for the Pound. Additionally, the news of a gradual decline in food inflation offered support to Sterling, fostering hopes that the cost-of-living crisis would begin to ease.

In the middle of the week, the final services PMI data presented a mixed outlook, which had minimal impact on the Pound. Typically, a confirmed slowdown in the service sector would weigh on Sterling, but since the figures still indicated five consecutive months of growth, the impact was limited.

Towards the end of the week, with a lack of significant economic data, the Pound became more vulnerable to market dynamics. Despite ongoing concerns about a potential recession, the Pound remained supported by short-term strength driven by expectations of higher interest rates.

Looking ahead to the following week, the Pound (GBP) can expect a more eventful data calendar compared to the previous weeks.

On Tuesday, the latest unemployment rate for May will be released. Economists predict that it will remain at 3.8%, indicating a tight labor market, which could suggest a need for further interest rate hikes.

However, the latest wage growth data for May is expected to have cooled down. As a significant factor contributing to inflationary pressures, this could reduce the necessity for additional tightening measures and potentially weaken the Pound.

Thursday will bring the release of the latest GDP data. Forecasts indicate that the UK economy experienced stagnation in May. This could undermine the strength of the Pound, as the country's economic health is closely scrutinized amid elevated interest rates.

EUR

The Euro (EUR) faced mounting pressure as a series of discouraging data outweighed the hawkish stance of the European Central Bank (ECB).

The manufacturing PMI data confirmed a rapid contraction in Eurozone factory activity, reaching its lowest level in three years since June 2020. This decline dragged the Euro down, but the ECB's commitment to tackling inflation helped limit further losses.

Adding to the pressure on the Euro was disappointing German trade data. In May, exports in the largest European economy unexpectedly contracted by 0.1%, contrary to the anticipated 0.3% increase. The overall trade surplus also narrowed to its lowest level since December. These figures raised concerns among EUR investors about the state of the German economy.

Midweek, the Euro softened further with the release of weaker-than-expected service PMI data. The June figure was revised down to 52.0 from the preliminary 52.4, and it was significantly lower than May's reading of 55.1. Although the figure remained above 50, indicating expansion, the modest increase represented the lowest level since January.

The Euro received a modest boost from the unexpectedly strong recovery in German factory orders, which greatly exceeded forecasts. Instead of the predicted 1.2% increase, orders surged by 6.4% in May.

However, at the end of the week, German industrial production unexpectedly declined. Contrary to expectations of zero growth, factory activity in Germany contracted by 0.2% following a 0.3% expansion in April. Lingering concerns about the struggle for recovery in the Eurozone's largest economy weighed on the single currency.

USD

The US Dollar (USD) faced challenges at the beginning of the week when the ISM manufacturing PMI unexpectedly dropped to its lowest level since May 2020.

On Tuesday, the US Dollar struggled to gain traction due to market closures in observance of Independence Day.

The release of the Federal Open Market Committee (FOMC) minutes did little to strengthen the US Dollar, but it did reaffirm the possibility of further interest rate hikes by the Federal Reserve.

Thursday saw a significant surge in the ADP employment figures and an ISM services PMI that surpassed forecasts. This prompted a rally in the US Dollar as investors began pricing in additional rate hikes from the Fed, which dampened market sentiment.

Friday's nonfarm payrolls data for June fell well below expectations, with only 209,000 jobs added instead of the anticipated 225,000. This injected significant volatility into the US Dollar, resulting in losses against most major currencies. However, these losses were partially cushioned by a decrease in the unemployment rate, indicating a tight labor market.

Looking ahead, the upcoming inflation data for the US is scheduled to be released on Wednesday. Forecasts suggest a cooling in both headline and core inflation for June. This could weaken the US Dollar as it would reduce expectations of future interest rate hikes.

On Thursday, the latest Producer Price Index (PPI) data will be released, with an expected increase of 0.2%. This could provide support for the US Dollar.

Finally, on Friday, the latest Michigan consumer sentiment reading is expected. Forecasts anticipate a slight increase to 64.8 in July, which may boost confidence among USD investors, indicating continued resilience among US consumers.

Data for the week ahead

Monday

01.30 CNY Consumer Price Index

15.00 GBP Bank of England's Governor Baily speech

Tuesday

06.00 GBP Claimant Count Change

06.00 ILO Unemployment Rate

06.00 EUR German Harmonized Index of Consumer Prices

Wednesday

02.00 NZD Monetary Policy Statement

02.00 NZD RBNZ Interest Rate Decision

12.30 USD Consumer Price Index

14.00 CAD Bank of Canada Monetary Policy Report

14.00 CAD Bank of Canada Interest Rate Decision

15.00 CAD Bank of Canada Press Conference

Thursday

12.30 USD Producer Price Index ex Food and Energy

Friday

14.00 USD Michigan Consumer Sentiment Index

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