GBP slumps after UK growth outlook is downgraded
The Pound experienced a significant decline in its exchange rate last week following a dovish rate hike and a downgraded growth outlook from the Bank of England (BoE). As of the current moment, the GBP/EUR exchange rate is trading at approximately €1.15927, remaining close to the day's opening levels, while the USD is trading around US$1.2767.
The week started with the Pound Sterling (GBP) receiving moderate support due to differences in central bank policies. While other major central banks are nearing the end of their tightening cycles, the Bank of England (BoE) still has a considerable way to go before effectively managing inflation. Nevertheless, the final manufacturing PMIs indicated a notable slowdown in the sector, hitting a three-year low.
On Thursday, the BoE implemented an anticipated 25 basis points rate hike, but the accompanying statement presented a more dovish stance, leading to reduced demand. The central bank subsequently lowered its economic forecast and inflation expectations, unsettling GBP investors and causing the Pound to plunge to multi-month lows.
Toward the end of the week, the Pound managed to recover a significant portion of its losses as the market sentiment improved, particularly due to a weakening US Dollar (USD). This recovery occurred despite ongoing economic concerns and the UK being stuck in a low-growth trap.
Looking ahead to the upcoming week, the Pound's data calendar remains relatively light until Friday. Consequently, Sterling could be influenced by changes in risk appetite, with negative sentiment potentially weakening the currency. The Friday release of the latest GDP data for Q2, which is expected to show a 0.1% expansion, could provide optimism to GBP investors by indicating that the Sterling managed to avoid a recession.
EUR
As for the Euro (EUR), it had a slow start to the week despite positive GDP growth and stable core inflation at 5.5%. This data increased expectations for rate hikes, but uncertainty about the European Central Bank (ECB) timeline for tightening dampened demand. Even stronger-than-expected German unemployment figures failed to bolster the Euro's appeal, as the currency continued to face challenges.
The Euro's negative correlation with the US Dollar further weighed on its performance, as the latter gained strength due to a deteriorating market sentiment. Disappointing Producer Price Index (PPI) figures added to the Euro's troubles, leading to reduced bets on rate hikes. However, the Euro's fortunes turned around toward the end of the week, as the latest US jobs data indicated a cooling labor market, diminishing expectations for Federal Reserve rate hikes.
Final German inflation data could provide an early indication of ongoing inflation trends in the Eurozone. An anticipated 6.2% easing may reinforce the perception that the battle against inflation is abating, potentially increasing rate hike expectations and boosting the Euro.
USD
In the case of the US Dollar (USD), the week began with a stumbling start, as the safe-haven currency struggled amid positive market sentiment. Surprisingly, a decrease in JOLTs job openings on Tuesday actually strengthened the USD, triggering concerns about a potential US recession and prompting risk-averse trading.
The US Dollar gained momentum on Wednesday following robust ADP employment data, which exceeded expectations and fueled additional bets on Federal Reserve rate hikes. However, wavering trade on Thursday, caused by a disappointing reading from the ISM service sector index, led to USD fluctuations.
The week concluded with the latest non-farm payrolls data dragging down the US Dollar, falling below 200,000 for the first time since December 2020. This led to a reduction in Federal Reserve rate hike expectations, exerting significant pressure on the USD.
Looking ahead for the US Dollar, the data calendar is relatively sparse for most of the week, potentially leaving the currency susceptible to shifts in risk appetite. As a safe-haven asset, improved market sentiment may limit the appeal of the USD.
Thursday's release of the latest inflation data for July could impact the US Dollar. Economists forecast a further cooling of headline inflation to 2.8%, while core inflation is expected to decrease to 4.7%. Accurate readings in line with these predictions may weaken the US Dollar by suggesting reduced necessity for additional tightening by the Federal Reserve.
Following this, the release of initial jobless claims data, reflecting the week ending August 5th, could spark concerns if the forecasts indicate an increase. However, if the claims remain within a narrow range, it might generate hopes of a soft landing for the US labor market.
On Friday, the producer price index data is set to be released, with a projected 0.1% increase. This may have limited impact on rate hike expectations and USD rates. Finally, the Michigan consumer sentiment index, predicted to decline in August, could further weigh on the US Dollar due to reduced sentiment.
Data for the week ahead
Monday
16.00 GBP Bank of England's Pill Speech
Tuesday
06.00 EUR German Harmonized Index of Consumer Prices
Wednesday
01.30 CNY Consumer Price Index
03.00 NZD RBNZ Inflation Expectations
Thursday
12.30 USD Consumer Price Index
12.30 USD Consumer Price Index excluding Food & Energy
Friday
06.00 GBP Gross Domestic Product
12.30 USD Producer Price Index excluding Food & Energy
14.00 Michigan Consumer Sentiment
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