GBP and EUR struggle as negative economic impact increases

The GBP exchange rate faced a turbulent week as several factors influenced its performance. The Pound weakened due to a decline in UK service-sector activity, falling house prices, and a dovish stance from the Bank of England (BoE). Meanwhile, the Euro encountered its own challenges, with a weakening German economy impacting sentiment and a divided European Central Bank (ECB) regarding monetary policy tightening.

Throughout the week, the Pound struggled against most major currencies, primarily affected by diminishing business activity, declining house prices, and indications that the UK's central bank would delay further monetary policy tightening.

The week began with GBP trading sideways due to a lack of significant data. However, on Tuesday, despite positive data from the British Retail Consortium, which showed August sales exceeding forecasts at 4.3%, the Pound dropped. The continued contraction in the UK's service sector likely contributed to Sterling's downward trend.

Midweek, recession predictions weighed further on the Pound, and speeches from the Bank of England's Swati Dhingra and Governor Andrew Bailey appeared to signal a shift from their previous hawkish stance to a more dovish one.

By Thursday, the Pound faced additional headwinds as data revealed that UK house prices had fallen at the sharpest rate in fourteen years. While an empty UK economic calendar on Friday prevented further losses in Pound exchange rates, it provided no support either as GBP/EUR headed into the weekend.

In the upcoming week, the Pound Euro exchange rate is expected to be volatile due to a plethora of scheduled data releases from both the UK and the Eurozone.

If UK unemployment rises and wage growth remains high, the Pound may encounter headwinds early in the week. Conversely, GBP/EUR could rise if German economic sentiment deteriorates further.

Midweek, UK GDP data for July is anticipated to show a contraction, potentially weighing on Sterling. However, a decline in industrial production across the Eurozone may limit GBP/EUR losses. Additionally, if US core inflation remains unchanged for August, the USD might weaken due to reduced rate hike expectations, which could provide support to the Euro, given their negative correlation.

EUR

Despite gaining ground against the Pound, the Euro encountered its own challenges last week as Germany's economic indicators signaled deterioration, and uncertainty surrounding the European Central Bank's (ECB) future actions dampened EUR confidence.

The week began with Germany's trade surplus falling short of expectations, recording €15.9 billion instead of the anticipated €18 billion.

Subsequently, ECB President Christine Lagarde delivered a speech strongly condemning misinformation about the bank's economic policies but failed to provide clarity on policymakers' true intentions. This left investors in the single currency unimpressed.

On Tuesday, a risk-off sentiment in the market led to increased demand for perceived safer currencies like the US Dollar (USD) and Japanese Yen (JPY). Furthermore, a series of disappointing data releases midweek limited Euro gains, with retail sales in the Eurozone declining by 0.2% and German factory orders plummeting by a significant 11.7%.

By the end of the week, the Euro continued to face pressure due to a GDP reading from the Eurozone that was smaller than expected, along with ongoing mixed rhetoric from the ECB.

The ECB's interest rate decision on Thursday, coupled with UK sales data, is expected to drive market movements. Additionally, further US data releases on Friday could impact the Euro's momentum. If the ECB maintains interest rates unchanged, the single currency may encounter headwinds going into the following weekend.

USD

The GBP/USD exchange rate witnessed a decline throughout the past week, primarily driven by robust US data that bolstered expectations of future interest rate hikes.

The US Dollar (USD) started the week on a defensive note, as positive market sentiment and light trading volumes exerted pressure on the 'Greenback'. With markets closed for Labor Day, the USD struggled to gain traction.

However, the following day saw a shift in market sentiment as weak economic data rattled investors and disrupted the positive mood. This was compounded by a spike in oil prices, which raised concerns about rising inflation, further dampening market sentiment.

Wednesday witnessed a significant surge in the US Dollar, triggered by the release of the latest US services PMI from the ISM. The data revealed the fastest expansion in activity in six months, heightening expectations of additional tightening by the Federal Reserve.

Thursday brought additional support for the 'Greenback' as initial jobless claims dropped, indicating a tight labor market.

Nevertheless, on Friday, the absence of significant data drivers led to lackluster trading for the US Dollar, as market sentiment shifted back towards optimism.

Looking ahead, the US Dollar's performance in the coming week is likely to hinge on data releases concentrated towards the end of the week. On Wednesday, the latest inflation data is set to be unveiled, with economists anticipating an uptick in headline inflation, although the core consumer price index is expected to have moderated in August. The core reading may take precedence and could weaken the USD by suggesting that inflation has peaked.

On Thursday, August's US retail sales data is expected to show a slowdown, potentially exerting downward pressure on the USD.

Finally, on Friday, the release of the Michigan consumer sentiment index is on the agenda, and economists predict it will hold steady, which could bring optimism to USD investors.

Data for the week ahead

Monday

08.00 GBP Bank of England's Pill Speech

23.00 GBP Bank of England's Mann Speech

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Tuesday

06.00 GBP Claimant Count Change

06.00 GBP Employment Change

06.00 GBP ILO Unemployment Rate

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Wednesday

12.30 USD Consumer Price Index

12.30 USD Consumer Price index Excluding Food & Energy

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Thursday

01.30 AUD Employment Change

01.30 AUD Unemployment Rate

12.15 EUR ECB Monetary Policy Decision Statement

12.30 USD Producer Price Index

12.30 USD Retail Sales

12.45 EUR ECB Press Conference

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Friday

02.00 CNY Industrial Production

02.00 CNY Retail Sales

14.00 USD Michigan Consumer Sentiment Index