Sterling Weighted by Uncertainty, Euro Braces Amidst Policy Divergence & Dollar Holds Steady
GBP
The Pound experienced a decline from its recent monthly high against the Dollar, dropping to approximately 1.2610 (current as of time of writing), just ahead of Bank of England Governor Andrew Bailey’s scheduled speech this evening. GBP|EUR has traded fairly flat since dropping from its monthly high of 1.1740 last week, currently trading at 1.1718 (at the time of writing).
Last week, BoE officials emphasised the focus on the duration of interest rate constraints, dispelling concerns about further tightening of policy.
BoE policymakers cautioned about upward risks to inflationary pressures, supporting the argument for maintaining restrictive interest rates for an extended period.
In comparison to other Group of Seven economies (G7), the United Kingdom faces persistent inflationary pressures, particularly driven by robust wage growth and service sector inflation. Therefore, investors and speculators’ attention is likely to be directed towards the Average Earnings data as an indicator of market movement.
Forecasts suggest a slowdown in wage growth, with expectations for a decrease in wage growth excluding bonuses to 6.0% for the three months ending December, compared to the previous rate of 6.6%.
Similarly, Average Earnings including bonuses are projected to have grown at a slower pace during the same period. A deceleration in wage growth could alleviate pressure on BoE policymakers and increase speculation about the possibility of an early rate cut.
Sterling is anticipated to experience volatility throughout the week due to a series of data releases. Key indicators such as employment figures (Tuesday), inflation data (Wednesday), quarterly Gross Domestic Product (Thursday), and Retail Sales data (Friday) are all scheduled for release. Tuesday will also see the release of labour market data, with expectations for a decrease in the ILO Unemployment Rate for the three months ending December to 4.0%, down from the previous rate of 4.2%.
EUR
Recent remarks from ECB officials have showcased a wide array of perspectives on monetary policy. There is growing speculation that monetary easing may commence as early as June, a sentiment gaining traction among investors with increasing conviction.
GBP|EUR has found robust support around the 1.17 mark, and any significant upward movement in UK economic data this week would be necessary to propel the currency pair to new highs.
In the Eurozone, there are two key data releases scheduled for the upcoming week. Firstly, the German ZEW survey for February, set to be released on Tuesday, will provide insights into the performance of the region’s largest economy. Consensus forecasts anticipate an economic sentiment figure of 17.5, compared to the previous reading of 15.2, while the consensus for the current situation is -79, versus the previous -77.3.
Investors and speculators will closely monitor Eurozone GDP figures on Wednesday to assess the economic pressure faced by the region in December and the final quarter of the year. Forecasts suggest a month-on-month reading of -0.2% for December, compared to -0.3% in the previous month, and a quarter-on-quarter figure of 0% for the final quarter, consistent with the previous quarter’s performance.
Sentiment towards the Eurozone remains subdued, and further disappointments in economic data are likely to be disregarded by the Euro. Consequently, any unexpected positive surprises could prompt a downward movement in GBP|EUR, potentially pushing it below the 1.17 level.
USD
The US Dollar has maintained its status as the top-performing currency in 2024, although it has experienced a recent slowdown in momentum. The GBP|USD pair is grappling with uncertainty at the start of the week as investors await crucial inflation data releases from both the US and the UK. Recent US data releases have been robust, and continued strength will be necessary for the Dollar to regain its momentum.
Meanwhile, the US Dollar Index has found support around the 104.00 mark. Market sentiment is subdued as anticipation builds for the release of United States inflation data for January, scheduled for Tuesday.
Forecasts suggest that US headline inflation may have moderated to a growth rate of 2.9% year-on-year, down from 3.4%. Similarly, core inflation, which excludes food and energy prices, is expected to have slightly decelerated to 3.7% from 3.9%. Any further easing in inflation data could dampen the attractiveness of the Dollar.
In addition to the pivotal inflation data, Retail Sales figures are due on Thursday, with consensus expectations pointing to a 0.1% contraction compared to the previous month’s 0.6% growth. Finally, to conclude the week, Producer Price Index (PPI) Figures are scheduled for release on Friday. The PPI measures the average changes in prices in primary markets of the US by producers of commodities across all states of processing. Consensus forecasts anticipate a 1.6% increase compared to the previous year’s figure of 1.8%.
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