Sterling faced significant headwinds during the European session on Monday, as market sentiment turned sour. GBP|USD witnessed a sharp decline, driven by the robust Nonfarm Payrolls data from the United States on Friday, which tempered expectations of a Federal Reserve rate cut in March. The strong US job creation figures, coupled with unexpected wage growth, underscored persistent inflationary pressures. GBP|USD is currently trading at around 1.2523 and GBP|EUR trading around 1.1676, at the time of writing.
The UK economy teeters on the brink of a technical recession, with GDP contracting by 0.1% in the third quarter of 2023, and a lacklustre performance anticipated in the final quarter. A failure to achieve economic recovery would have profound implications for the labour market. The outlook for Bank of England policymakers is increasingly complex amid mounting concerns of a potential recession. Higher interest rates have exacerbated the cost-of-living crisis leading businesses to operate at reduced capacity.
Despite a seemingly more hawkish stance on interest rates from the Bank of England compared to the Fed, the Pound Sterling has encountered significant downward pressure. Investors are wary that subdued economic performance and escalating geopolitical tensions could prompt BoE policymakers to consider earlier-than-expected interest rate cuts.
During the recent monetary policy meeting, BoE policymaker Swati Dhingra advocated for a 25 basis point rate cut, while policymakers Catherine Mann and Jonathan Haskel supported a similar-sized rate hike. The vulnerable economic outlook may compel BoE policymakers to align with Dhingra’s position and tilt towards easing interest rates in forthcoming meetings.
Amidst these challenges, S&P Global reported encouraging Composite and Services PMI figures for January. The Composite PMI exceeded expectations, reaching 52.9, while the Services PMI rose to 54.3, indicating positive momentum compared to previous readings.
On the data front the calendar is extremely sparse this week, with no high impact data coming out of the UK, investors and speculators will look to the minimal data releases coming out of the US and Eurozone.
Robust US employment data pushed EUR|USD back below the 1.08 mark, reflecting the cautious stance of investors amidst the prevailing low volatility environment. While there is a temptation to anticipate a downward trajectory towards the 1.07 level, such movement is likely to be influenced by developments on the US side.
Meanwhile, the eurozone’s economic calendar remains relatively subdued, with attention directed towards scheduled speeches from ECB officials.
Despite ongoing market expectations of over a 50% likelihood of an ECB rate cut in April, there still remains the possibility of Euro positivity in the short-term rates, if a cut is ruled out. However, it remains uncertain whether this week will bring clarity regarding the potential removal of the April rate cut expectation.
The only meaningful data release coming out of the Eurozone this week will be retail sales figures due tomorrow. Consensus is -0.9% vs a previous of -1.1% (YoY).
GBP|USD has experienced a notable decline of over 1.5% since Friday, driven by a rally in the US Dollar following the impressive labour market data for January. The US Nonfarm Payrolls increased by 353,000 in January, surpassing expectations. Furthermore, the Bureau of Labor Statistics announced revisions to the November and December figures, totaling an additional 126,000 jobs. Consequently, the benchmark 10-year US Treasury bond yield surged above 4%, and the USD Index, which measures the performance of the USD against a basket of major currencies, rose by more than 0.8%, reaching its highest level since early December, surpassing 104.00.
Fed Chairman Jerome Powell, speaking in an interview with CBS on Sunday, reiterated his cautious stance, suggesting that the March policy meeting might be too soon to consider lowering rates. Unless policymakers challenge Powell’s stance and keep the possibility of a rate cut in March on the table, the USD is likely to maintain its strength. With the robust jobs report for January, Fed officials are unlikely to adopt a dovish tone.
ISM released the Services PMI report for January this afternoon and surprise uptick vs consensus has led further strength to the Dollar. No significant data releases for the remainder of the week.
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