Sterling Holds Ground, Eurozone Struggles, USD Faces Fed Speculation
GBP
Sterling has displayed resilience in the face of recent dovish sentiments from the Bank of England, with GBP|EUR hovering around 1.1675 and GBP|USD at 1.2565 as of the time of writing. However, Sterling remains susceptible due to various factors, including a slowdown in inflation and a generally gloomy market sentiment.
According to the British Retail Consortium (BRC) report released on Tuesday, shop price inflation in the UK registered a modest growth of 1.3% in March, marking its slowest expansion in over two years. This represents a notable deceleration from the 2.5% uptick recorded in February. The subdued inflationary pressure was driven by softer pricing across both food and non-food items. Non-food prices edged up by a mere 0.2% compared to the previous month’s 1.3% rise, while food prices increased by 3.7%, down from 5.0%.
The easing of shop price inflation could potentially provide relief for Bank of England policymakers, offering them leeway to contemplate interest rate reductions after maintaining them at elevated levels for over two years. Currently, market expectations lean towards the possibility of the BoE initiating interest rate cuts starting from the June meeting.
Despite a relatively subdued week in terms of UK data and speaker engagements, Thursday’s release of final services and composite PMI figures could offer support to the Sterling, especially if they confirm robust readings. Apart from PMI, investors and speculators will be watching US jobs and Eurozone inflation data to see how the Pound performs.
EUR
As speculation swirls around potential inflationary easing in the Eurozone’s leading economy, heightened expectations of interest rate cuts by the European Central Bank (ECB) are curbing investor enthusiasm for the common currency today, resulting in a decline in the EUR against its primary counterparts.
The Euro is facing challenges below the 1.0800 threshold against the Dollar, as market participants grapple with assessing the probability of the Federal Reserve (Fed) initiating an easing cycle starting in June. The Euro’s also struggling against the Pound amid numerous German states reporting easing inflation.
The upcoming release of the Core Harmonized Index of Consumer Prices, which tracks the price changes of a standardised basket of goods and services in the European Monetary Union, is anticipated to garner significant attention from investors and speculators. Analysts will closely monitor this data to gauge the potential direction of the European Central Bank’s (ECB) future monetary policy decisions. Additionally, Eurozone Retail Sales, serving as an indicator of consumer spending, are scheduled for release on Friday. Consensus forecasts anticipate a decline of -1.3%, compared to the previous reading of -1%, suggesting a bearish sentiment regarding the overall European economy.
USD
Market sentiment has soured as expectations for a June interest rate cut by the Federal Reserve have been tempered. This shift followed the release of stronger-than-anticipated Manufacturing PMI data for March by the United States Institute of Supply Management (ISM). For the first time in 16 months, the Manufacturing PMI exceeded the crucial 50.0 threshold, signalling a potential recovery in the US factory sector from the prolonged impact of high interest rates.
Cable, reflecting sluggish UK inflation and a gloomy market sentiment, remains susceptible to fluctuations. Traders eagerly await Wednesday’s Fedspeak, seeking clues about the trajectory of interest rates and the overall policy stance.
Additionally, February’s US JOLTS Job Openings data remained stable, with employers posting 8.756 million openings, slightly surpassing expectations. Despite this, various Fed officials expressed divergent views on the monetary policy outlook. Cleveland Fed Bank President Loretta Mester expects rate cuts this year but rules out action at the upcoming May policy meeting. Similarly, San Francisco Fed Bank President Mary Daly anticipates rate cuts but awaits further evidence of inflation cooling. Daly considers three rate cuts this year as a plausible scenario, although uncertainties persist. Market sentiment, as reflected in the CME FedWatch Tool, now suggests a reduced probability of a rate cut by June, standing at approximately 65%.
In other US economic news, February’s JOLTS Job Openings climbed to 8.756 million, surpassing market expectations, while Factory Orders improved by 1.4% MoM in February, rebounding from the previous month’s decline. Looking ahead we have Fed Chair Powell due to speak this afternoon, markets will be watching closely for any hints in regards to June rate cuts. Additionally, scheduled for Friday is the release of US Nonfarm Payrolls, a key indicator reflecting the number of new jobs added in the US across all non-agricultural sectors during the preceding month. Market consensus forecasts the figure to stand at 200k compared to the previous 275k. Typically, a higher-than-expected reading is perceived as bullish for the US Dollar, whereas a lower-than-expected reading is considered bearish.
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