Sterling and Euro struggling for direction as USD holds strong

GBP

The Pound grappled with uncertainty as the week commenced due to a dearth of UK economic updates. Concurrently, heightened risk appetite prompted the Pound, which is increasingly sensitive to risk, to fluctuate widely against other currencies. It weakened against riskier counterparts but strengthened against safe-haven currencies.

On Tuesday, Sterling experienced a similar lack of direction, as a lack of UK data kept the GBP adrift against its main counterparts. Market risk factors remained the primary driver behind GBP fluctuations during the session.

Wednesday's continued absence of significant macroeconomic updates led to Sterling's decline against the US Dollar, with pessimistic trading conditions dampening demand for the riskier currency.

During Thursday's trading session, the Pound made modest gains against certain counterparts, buoyed by remarks from Bank of England policymaker Megan Greene, who advocated against interest rate reductions.

Greene asserted that persistent UK inflation might prompt the central bank to lean towards a more restrictive monetary policy in the upcoming months, which initially boosted Sterling. Nonetheless, as the session unfolded, GBP ultimately weakened against its key counterparts.

Friday brought the release of the UK's most recent GDP report, revealing that the economy grew less than expected, with a 0.1% expansion in February. Although economists acknowledged this as a sign of recovery from last year's technical recession, the underwhelming figure underscored continued economic vulnerability, resulting in the Pound remaining rangebound as the week concluded.

Moving forward, the key factor likely to influence the movement of the pound exchange rate this week is the upcoming release of UK inflation data for March.

With expectations for a cooling in both UK headline and core inflation figures, there's a potential for Sterling to be shaken by heightened speculation regarding a possible rate cut by the Bank of England.

Prior to that, the UK will unveil its most recent jobs data. If February's unemployment rate is projected to increase, it might weaken GBP exchange rates. Nevertheless, this could be counterbalanced by anticipated growth in wage levels.

EUR

Last week, the Euro started off with fluctuations, as mixed German data made it challenging for the common currency to attract buyers. While a significant decline in German exports during February weighed on sentiment, robust growth in industrial production provided some offsetting support.

As the middle of the week approached, the euro continued to exhibit a mixed performance, with a dearth of economic data releases hindering the currency's ability to establish a clear direction.

Yet, on Thursday, EUR exchange rates took a tumble following the European Central Bank's latest interest rate decision.

Despite the central bank maintaining rates at 4.5% for the sixth consecutive month in April, the accompanying forward guidance suggested an impending rate cut, leading markets to anticipate a reduction in June.

Friday saw the single currency unable to recover from its losses following the release of Germany's latest inflation data.

German inflation eased to 2.2% in March, down from the previous reading of 2.5%, marking its lowest level since May 2021.

Following the ECB's dovish stance on Thursday, indications of weakening inflation in the Eurozone's largest economy fueled speculation of an ECB rate cut, resulting in EUR exchange rates ending the week on a downward trend.

Moving forward, the main catalyst for movement in the euro exchange rate this week is expected to be the release of the Eurozone's inflation data for March.

Anticipated cooling in both Eurozone headline and core inflation figures is likely to contribute to a weakened EUR exchange rate, fueled by heightened speculation of an ECB rate cut. Additionally, Tuesday will feature the release of Germany's Zew economic sentiment index.

USD

As Monday's session commenced, the US Dollar weakened, influenced by a mixed market sentiment that initially limited movements in the safe-haven currency. As market mood improved, the USD dropped to a two-week low against certain counterparts, compounded by a decrease in US Treasury yields. Nevertheless, as risk sentiment deteriorated later in the session, the USD's losses were mitigated by a shift towards safer currencies.

Tuesday saw the USD facing challenges once again due to a lack of significant releases, while global markets experienced a cautiously optimistic trading atmosphere.

Subsequently, Wednesday's unveiling of the latest US consumer price index sparked a surge in the USD against its counterparts, with inflation surpassing forecasts. Headline inflation surged beyond economists' projections, climbing from 3.2% to 3.5%, while core inflation remained steady at 3.8%, defying expectations of a decrease. The unexpectedly high inflation figures prompted markets to considerably reduce their expectations of a Federal Reserve interest rate cut, extinguishing any speculation that the Fed might lower its base rate in June.

On Thursday, the USD experienced a slight retreat due to heightened profit-taking, with investors capitalizing on the currency's five-month high. Additionally, an improvement in market sentiment further dampened the greenback's strength.

The USD concluded the week on a robust note as resistance against Fed rate cuts persisted, continuing to uplift the greenback.

Moving forward, the upcoming release of the latest US retail sales data is scheduled for Monday afternoon. Predicted to decrease slightly in March to 0.3%, reduced consumer activity may exert downward pressure on USD exchange rates.

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