GBP makes gains despite economic worries
The GBP/EUR exchange rate experienced a robust increase of over 1% last week, fueled by higher-than-anticipated inflation and wage growth. This boost in economic indicators has raised expectations of an interest rate hike from the Bank of England (BoE).
Overall, the GBP/EUR surged and concluded the trading session near the €1.1723 level, marking a significant jump of more than 1% compared to the beginning of the week.
Despite concerns about the UK economy's condition, the Pound (GBP) managed to overcome economic uncertainties and made substantial gains against many of its counterparts, driven by increased bets on a forthcoming interest rate hike.
The week commenced with Sterling showing modest movement, as a lack of economic data led GBP investors to contemplate the economy's fragility. However, as the week progressed, mixed employment data presented a nuanced view of the UK labor market. Despite an unexpected rise in unemployment, record-high acceleration in average wages captured investors' attention, leading to a substantial surge in the GBP's value.
In the middle of the week, headline inflation aligned with expectations, resulting in a decline to a 17-month low. Nevertheless, core inflation remained steady at 6.9%, unchanged from the previous month. With persistent inflationary pressures, the likelihood of another interest rate hike from the Bank of England (BoE) was already factored into the market, contributing to the Pound's upward momentum.
On Thursday, GBP/USD briefly reached a nearly two-week high as market participants digested the data; however, Sterling was unable to maintain its gains.
Friday brought the release of the latest UK retail sales data, indicating a substantial 1.2% contraction in July, significantly surpassing the expected 0.5% decline. This downturn in retail sales caused the Pound to retreat, thereby trimming its weekly gains.
EUR
In contrast, the Euro (EUR) struggled to maintain consistent demand throughout the week due to fluctuating market sentiment, limited Eurozone data, and a resurgent US Dollar (USD), all of which exerted downward pressure on the single currency.
The week's onset witnessed a resurgent US Dollar capitalizing on its inverse correlation with the Euro during a period of negative market sentiment. Nonetheless, a surprise increase in Germany's ZEW economic sentiment index buoyed investor confidence.
Additionally, although both Euro area industrial production and the second estimate for Eurozone GDP growth surpassed expectations, the Euro failed to gain substantial traction. Industrial production grew by 0.5%, and Eurozone economic growth unexpectedly returned to positive territory. Despite these positive indicators, a cautious market mood and concerns about global growth prospects limited the Euro's demand, resulting in relatively lackluster trading towards the week's conclusion.
Looking ahead to the upcoming week, the Pound Euro exchange rate could experience further movement despite a relatively sparse economic calendar. Manufacturing and service PMIs are scheduled for release for the UK, Eurozone, and Germany. Anticipated declines across these metrics could place both currencies under pressure.
Market sentiment will remain a key determinant of currency movements. Any additional signs of economic challenges in China's recovery could weigh on risk sentiment, potentially negatively affecting the more volatile Pound.
USD
Meanwhile, the US Dollar (USD) demonstrated strength at the beginning of the week due to risk-averse trading, driven by renewed concerns about China's property sector.
Subsequently, stronger-than-expected US retail sales data on Tuesday failed to bolster the USD, as the positive sales growth in July actually enhanced risk appetite and weakened the currency.
After a relatively subdued Wednesday session, the US Dollar gained strength later in the week following the release of the Federal Reserve's meeting minutes. These minutes expressed worries about inflation's potential upside risks, leading markets to anticipate another rate hike from the US central bank.
The USD briefly surrendered these gains the following day amid improved market sentiment, though a drop in jobless claims prevented more substantial losses.
As the week concluded, the US Dollar managed to recover some of its losses against the Pound due to a worsening market mood, which enhanced the safe-haven appeal of the USD and put pressure on the more risk-sensitive Pound.
In the upcoming week, the beginning is expected to be relatively quiet, with no significant data releases on Monday. Midweek, the latest PMI figures for the US will be published. These PMI scores for the US are projected to surpass those of the UK, potentially exerting further pressure on GBP/USD.
Thursday's potential release of weak US data, including an anticipated 4% decline in durable goods orders for July and a slight increase in jobless claims, could dampen expectations of Federal Reserve actions and consequently weaken the USD.
The week could culminate in significant volatility due to the Federal Reserve's Jackson Hole Economic Symposium scheduled from August 24 to 26. Investors will closely monitor Fed Chair Jerome Powell's remarks for any indications about the central bank's future policy plans and its assessment of the US economy, which could trigger substantial movements in the GBP/USD exchange rate.
Data for the week ahead
Monday
06.00 EUR German Producer Price Index
Tuesday
22.45 NZD Retail Sales
Wednesday
07.30 EUR German HCOB Composite PMI
07.30 EUR German HCOB Manufacturing PMI
07.30 EUR German HCOB Services PMI
08.00 EUR HCOB Composite PMI
08.00 EUR HCOB Manufacturing PMI
08.00 EUR HCOB Services PMI
08.30 GBP Global/CIPS Composite PMI
08.30 GBP Global/CIPS Manufacturing PMI
08.30 GBP Global/CIPS Services PMI
13.45 USD S&P Global Manufacturing PMI
13.45 USD S&P Global Services PMI
Thursday
14.00 USD Jackson Hole Symposium
23.30 JPY Tokyo Consumer Price Index
Friday
14.00 USD Jackson Hole Symposium
14.05 USD Fed's Chair Powell Speech
09.00 EUR ECB's President Lagarde Speech
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