Reduced expectation of a rate hike dampens Sterling

Last week, the Pound (GBP) experienced a general decline as Sterling was affected by reduced expectations of a rate hike by the Bank of England (BoE). On the other hand, the Euro (EUR) was bolstered by a hawkish stance from the European Central Bank (ECB).

Starting this week, GBP/EUR is currently trading at €1.1555, having dropped by nearly a full percentage point over the past seven days. Furthermore, the GBP/USD pair also declined, reaching $1.2847, partly influenced by tight labor markets in the United States.

The Pound weakened against other currencies last week due to a lower-than-anticipated inflation report, indicating a decrease in price pressures during June to 7.9%. Although inflation remains high, the larger-than-expected decline from May to June suggests that the Bank of England might adopt a less aggressive monetary policy approach in the future.

At the beginning of the week, the Sterling faced downward pressure due to external factors and political uncertainties, which subdued GBP exchange rates. Concerns arose as by-elections approached, with economists fearing a significant drop in votes for the Conservative party could lead to government instability, thereby compromising the stability of the Pound.

Subsequently, Wednesday's inflation reading further dampened sentiment for the Pound. While some argued that the data would be welcomed by British households given the cost-of-living pressures, investors were more focused on Sterling's attractiveness for trading. Expectations for the BoE to hike interest rates to a terminal rate of 6% diminished, with markets now projecting rates to peak at 5.75%.

On Thursday, GBP/EUR attempted a recovery, and Sterling's positive momentum continued into Friday's session. An increase in UK retail sales, surpassing expectations, added some volatility to the Pound, but ultimately it managed to hold onto its earlier gains.

EUR

The Euro trended higher against the Pound last week, although its performance against other currencies was mixed.

At the beginning of the week, hawkish statements from the ECB provided support to the Euro. ECB policymaker Joachim Nagel indicated that the bank might raise interest rates at its next meeting, with an expected 25 basis-point hike.

However, trading on Tuesday was mixed due to a lack of significant data. ECB President Christine Lagarde emphasized the importance of maintaining geopolitical relationships in light of the situation in Ukraine, noting that trade restrictions were hindering economic growth.

Midweek, Pound weakness contributed to EUR/GBP's rise, but the Euro faced challenges against other currencies as declining inflationary pressures were confirmed. Speculation grew that the ECB might pause its rate hike plans at its September meeting.

As the week progressed, the Euro traded within a narrow range. Producer price inflation decreased in Germany, raising questions about ECB's hawkishness. Additionally, the Euro was influenced by the strength of the US Dollar (USD), given their strong negative correlation.

In the current week, the focus remains on the European Central Bank, with an expected interest rate hike. However, Euro sentiment could be shaped by the tone of the accompanying statement.

Also, the interest rate decision of the Federal Reserve will be of interest. A hawkish tone from the Fed could boost the US Dollar, putting pressure on the Euro.

USD

The US Dollar began the week with a decline as reduced expectations of a Federal Reserve interest rate hike weakened demand for the Greenback.

Furthermore, disappointing retail sales figures contributed to concerns among USD investors as sales growth slowed in June. However, a darkening market sentiment provided some support for the safe-haven US Dollar, given uncertainties in China's post-Covid recovery.

The US Dollar then rallied significantly after the latest jobless claims showed a two-month low and an unexpected decline in unemployment claims. The resilient labor market led to increased bets on a Federal Reserve rate hike, driving the strength of the US Dollar.

Looking ahead to the following week, the Pound US Dollar exchange rate might see further movements influenced by the latest PMI data. A slowdown in both manufacturing and services could add pressure to the Pound. However, despite the easing, the service sector is expected to remain in expansion territory, offering some hope for GBP investors.

Meanwhile, the Greenback could face limitations in gains due to an expected slowdown in both manufacturing and service PMIs. This could weigh on the US Dollar's performance.

Data for the week ahead

Monday

07.30 EUR German HCOB Composite PMI

07.30 EUR German HCOB Manufacturing PMI

07.30 EUR German Services PMI

08.00 EUR Eurozone HCOB Composite PMI

08.00 EUR Eurozone HCOB Manufacturing PMI

08.00 EUR Eurozone Services PMI

08.30 GBP S&P Global/CIPS Composite PMI

08.30 GBP S&P Global/CIPS Manufacuring PMI

08.30 GBP S&P Global/CIPS Services PMI

13.45 USD S&P Global/CIPS Composite PMI

13.45 USD S&P Global/CIPS Manufacuring PMI

13.45 USD S&P Global/CIPS Services PMI

Tuesday

08.00 EUR ECB Bank Lending Survey

Wednesday

01.30 AUD Consumer Price Index

01.30 AUD RBA Trimmed Mean CPI

18.00 USD Fed Interest Rate Decision

18.00 USD Fed Monetary Policy statement

18.00 USD FOMC Press Conference

Thursday

12.15 EUR ECB Monetary Policy Decision Statement

12.30 USD Gross Domestic Product Annualized

12.45 EUR ECB Press Conference

23.30 JPY Tokyo Consumer Price Index

Friday

01.30 AUD Retail Sales

03.00 JPY BoJ Interest Rate Decision

03.00 JPY BoJ Press Conference

12.00 EUR German Consumer Price Index

12.00 EUR German Harmonized Index of Consumer Prices

12.30 USD Core Personal Consumption Expenditures

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