GBP, EUR and USD weekly forecast

GBP

Sterling risks a setback if midweek inflation falls below expectations. The Pound has shown a slight upward trend against its G10 peers in recent days, returning to the middle of the range observed thus far in 2024.

There doesn't seem to be much that will cause significant movement ahead of Wednesday's release of UK inflation data. The market expects CPI inflation to drop to 2.1% year-on-year in April from 3.1% in March, while the core inflation rate is anticipated to decline to 3.7% from 4.2%. Any deviation from these expectations can impact the currency, with the Pound strengthening on upside surprises and weakening on any undershoot.

Another thing to keep an eye on will be the services release within the inflation release, which often generates the largest reaction within currency markets, the Bank of England have stated this is currently their main focus point. This is further highlighted when the Bank of England's deputy governor, Ben Broadbent, said earlier this month that he will be looking more closely at services inflation than wages in the short term.

The services release doesn't have an estimate, but any figure below last month's 6% will likely bolster expectations for a June interest rate cut. The Pound will almost certainly weaken if currency markets fully price in a June rate cut following the data release.

Looking ahead, the primary driver of movement for the Pound this week is likely to be the release of the UK’s latest inflation figures.

As both core and headline inflation are forecast to cool closer the BoE’s 2% target, this could see GBP exchange rates drop in mid-week trade.

We see the UK's preliminary PMI's scheduled for release on Thursday.

On Friday, the UK’s retail sales for April are forecast to show a marginal growth level of 0.3%, which could lead to GBP closing the week stronger against its peers.

EUR

The Euro began the week trading without a clear direction on Monday due to the absence of Eurozone data.

On Tuesday, the single currency was supported by a stronger-than-expected German ZEW economic sentiment index for May.

The data surpassed expectations, printing at 47.1 instead of the more modest estimate of 46, and increased from last month’s reading of 42.9. However, the Euro saw its potential gains capped following Germany’s latest inflation data.

April’s finalized inflation reading printed at 2.2% in the Eurozone’s largest economy, only marginally above the European Central Bank’s 2% target. This led to Euro exchange rates remaining on the defensive.

Going into Wednesday, the common currency struggled to attract support despite the release of some better-than-expected Eurozone data.

The latest industrial production figures exceeded market expectations in March, coming in at 0.6% instead of the expected figure of 0.5%. The Euro then failed to rise despite the release of the Eurozone’s second estimate GDP for the first quarter of the year.

The release confirmed that the Eurozone escaped its technical recession at the end of last year, with a 0.3% expansion of growth in the first three months of 2024. The Euro finished the week fluctuating against its peers after the release of the Eurozone’s latest inflation figures for April.

While headline inflation remained the same at 2.4% as expected, the core figure cooled from 2.9% to 2.7% for this reading, in line with analysts forecasts.

As core inflation fell closer to the ECB’s 2% target, EUR exchange rates struggled to gain momentum after the release.

USD

As Monday's session commenced, the US Dollar declined, influenced by a growing appetite for risk, which diminished investor interest in the safe-haven currency. Additionally, a slight decrease in US Treasury Yields further weakened the 'greenback' throughout the latter part of the session.

On Tuesday, the USD continued its downward trend following a downward revision to the latest American producer price inflation figures, which led markets to anticipate broader inflationary easing. However, Federal Reserve Chair Jerome Powell struck a hawkish tone during an afternoon address, suggesting that US inflation might take longer than expected to reach the central bank’s 2% target rate. Consequently, the USD's losses were somewhat mitigated as markets scaled back their bets on a Fed interest rate cut ahead of the imminent US CPI release.

On Wednesday, both headline and core inflation eased as forecasted to 3.4% and 3.6%, respectively. The indication that inflation might be once again moving downward prompted the USD to hit a one-month low as markets increased their expectations of a Fed rate cut. This was exacerbated by a weak set of US retail data, indicating a slowdown in consumer activity in the US.

On Thursday, initial jobless claims fell less than anticipated to 222,000, though investors found some encouragement in the decline from the previous week's figures. Consequently, the USD managed to regain some of its recent losses in the latter part of the session.

As the week drew to a close, the US Dollar found additional support amidst a downbeat market sentiment, leveraging its safe-haven status.

Looking ahead, an influx of Fed speeches as the week begins could drive notable volatility for the USD. If policymakers maintain a hawkish tone, the Dollar  might rebound from its recent lows.

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