GBP remains under pressure from Bank of England decision
Last week, the GBP/EUR exchange rate experienced a significant decline, largely influenced by the Bank of England's decision to maintain interest rates for the month. Simultaneously, the Euro (EUR) encountered challenges as the European Central Bank (ECB) adopted a dovish stance. The GBP/USD exchange rate, on the other hand, stabilized on Friday, despite further contraction in the UK's private sector indexes. This stability was primarily due to the prevailing positive market sentiment, which exerted downward pressure on the US Dollar.
The British Pound (GBP) saw a notable decrease in value against other currencies last week following the Bank of England's decision to abstain from raising interest rates. Market participants had somewhat anticipated the bank's shift towards a more dovish stance, given Wednesday's inflation data, which indicated a 0.1% decrease in August, contrary to expectations of an increase. However, Sterling lost support from the markets once the bank's decision became public.
Although inflationary pressures in the UK have stopped rising, they remain significantly above target levels. Pound traders are concerned that the failure to control inflation poses risks to vulnerable households and businesses. Additionally, a weaker-than-anticipated spending report on Friday underscored the fact that higher prices are eroding disposable income.
Furthermore, several policymakers had expressed support for another interest rate hike in the lead-up to the decision, undermining expectations of a rate pause.
Following the interest rate decision, BoE Governor Andrew Bailey acknowledged the challenge of balancing persistent inflationary pressures with high interest rates, emphasizing that the central bank closely monitors rising prices.
Looking ahead, the GBP/EUR exchange rate is likely to be influenced in the coming week by Germany's business climate data, as well as the UK's distributive trades index. The former is expected to weaken, potentially negatively affecting the Euro, while the latter suggests an improvement in UK retail. Given the difficult week Sterling has just endured, positive data releases may push GBP/EUR higher.
The Confederation of British Industry (CBI) is scheduled to release its distributive trades data for September. Although improvement is expected, the reading is likely to remain negative and may have limited impact on Sterling.
Beyond these events, the data calendar becomes less crowded for the rest of the week. Consequently, the GBP is susceptible to shifts in market sentiment and assessments of the UK's economic outlook. As a currency increasingly influenced by risk sentiment, bullish market conditions could provide some support. However, if investors remain cautious about the deteriorating UK economy, the GBP may struggle to gain ground.
On Friday, the final GDP growth rate for Q2 is set to be released. A surprising weakening could weigh heavily on Sterling, but no change is likely to have minimal impact.
EUR
The Euro exhibited strength against the Pound last week but encountered challenges in other currency pairs due to the European Central Bank's adoption of a dovish stance. Additionally, declining consumer confidence and easing inflationary pressures exerted downward pressure on the Euro.
At the beginning of the week, EUR/GBP saw a slight uptick, although the release of the final inflation figures for August on Tuesday, which showed a softening from 5.3%, tempered the gains. This development prompted caution among ECB policymakers.
In the middle of the week, the Federal Reserve decided to keep US interest rates unchanged but delivered a hawkish commentary, with officials expressing readiness to respond if inflation were to rise significantly. This strengthened the US Dollar (USD) and, in turn, limited the Euro's gains.
On Thursday, EUR/GBP experienced an upward surge as the Bank of England (BoE) disappointed bullish traders. However, in other Euro trades, particularly against the strong US Dollar, the Euro's performance was choppy, and speeches from ECB representatives failed to instill optimism.
Towards the end of the week, policymaker Pablo Hernandez de Cos indicated that the central bank might have concluded its policy tightening cycle.
It is anticipated that German consumer confidence will decline in the middle of the week, which could further weigh on the Euro. However, the highlight will be Friday's inflation data from the Eurozone.
A rise in price pressures is likely to foster a hawkish sentiment among ECB policymakers. However, both core and headline inflation are expected to have weakened, increasing the possibility of a decline in Euro exchange rates.
USD
The US Dollar (USD) initiated the previous week with a stable performance as investors awaited the Federal Reserve's impending interest rate decision.
A surge in risk appetite initially led to a weakening of the safe-haven 'Greenback' against riskier assets. However, this trend reversed as trade sentiment soured.
The Federal Reserve's decision propelled the US Dollar upward. Although the central bank left interest rates unchanged, Fed Chair Jerome Powell indicated the possibility of further tightening before the year's end if deemed necessary.
The 'Greenback' maintained its positive momentum for most of Thursday, with investors anticipating more tightening measures from the Fed. However, these gains were somewhat tempered by profit-taking, as investors sought to capitalize on the USD's strength.
On Friday, the latest private sector data for the United States presented a mixed picture. While the manufacturing sector showed improvement, the service sector edged closer to stagnation, resulting in substantial selling pressure on the 'Greenback'.
For the US Dollar, the economic calendar remains relatively sparse for most of the upcoming week. Consequently, the safe-haven 'Greenback' may be influenced by shifts in risk sentiment. Diminishing risk appetite is likely to boost the USD as investors seek safer investment options.
On Friday, the Federal Reserve's preferred measure of inflation is set to be released. The core PCE price index for August is expected to have moderated to 3.8%, potentially weakening the USD by reducing expectations of interest rate hikes.
Data for the week ahead
Monday
05.30 JPY Bank of Japan Governor Ueda Speech
13.00 EUR ECB's President Lagarde Speech
Tuesday
17.30 USD Fed's Bowman Speech
Wednesday
01.30 AUD Monthly Consumer Price Index
Thursday
01.30 AUD Retail Sales
12.00 EUR German Consumer Price Index
12.30 USD Gross Domestic Product
20.00 USD Fed's Chair Powell Speech
23.30 JPY Tokyo Consumer Price Index
Friday
06.00 GBP Gross Domestic Product
06.00 EUR German Retail Sales
09.00 EUR Core Harmonized Index of Consumer Prices
12.30 USD Core Personal Consumption Expenditures
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