Geopolitical Tensions Drive Investors to USD
GBP
Sterling took a hit, sliding to its lowest point against the Dollar since November, now hovering just above the 1.24 mark, all down to Dollar strength, mainly due to tensions in the Middle East boosting the Dollar’s safe-haven appeal.
Sterling is trading better against the Euro, trading around 1.1710, with the Euro weakness mainly due to the ECB’s recent decision to keep interest rates unchanged for the sixth time. Lane, a key ECB official, emphasised the bank’s focus on data and showed optimism about Eurozone inflation nearing the ECB’s 2% target.
Looking at jobs data released out of the UK this morning, expectations were for an increase in the number of people claiming unemployment benefits, with forecasts at 17.2K compared to the previous 16.8K. However, the actual figure surprised on the downside, coming in at 10.9K. On another front, while the unemployment rate was anticipated to remain steady at 4%, it unexpectedly rose to 4.2%. Additionally, employment change figures fell to -156K from -89K, highlighting uncertainty about the economic landscape. This uncertainty could prompt Bank of England policymakers to consider interest rate cuts sooner than anticipated.
Looking ahead for the week, expect increased volatility as the UK Office for National Statistics (ONS) releases consumer and producer inflation data for March on Wednesday. The headline CPI is projected to increase by 3.1%, down from the previous reading of 3.4%. If the inflation data indeed shows a decline as anticipated, it could further fuel speculation about the BoE starting to lower interest rates from the August meeting. We also have UK Retail Sales data due Friday which will give an insight as to how the general economy is performing.
EUR
The Euro continues to face challenges in gaining traction against other currencies, despite recent industrial production data showing a slight improvement in the Eurozone.
In February, output rebounded by 0.8%, following a 3% decline in the previous month. This aligns with market expectations, with increased production noted in capital goods and durable consumer goods sectors. However, the market response has been muted, as this modest recovery follows a broader trend of declining production throughout the first quarter of 2024.
Looking ahead, we anticipate upcoming industrial production data and ZEW investor confidence figures for the Eurozone. Additionally, there will be several ECB speakers this week, including President Christine Lagarde, who will address the spring IMF meetings in Washington on Wednesday. It’s expected that she will reiterate the possibility of an ECB rate cut in June and highlight potential divergences in trans-Atlantic monetary policy, which could lead to bearish sentiment for EUR|USD.
USD
Amidst a generally bullish sentiment surrounding the US Dollar, investors are delaying their expectations for the first Federal Reserve interest rate cut to September from June, following the release of stronger-than-expected US consumer inflation figures.
Geopolitical tensions in the Middle East are also boosting the dollar’s safe-haven appeal. As a result, the GBP|USD pair is likely to face downward pressure, with any attempted recovery seen as an opportunity to sell. Traders will closely watch US macro data and speeches by FOMC members, including Fed Chair Jerome Powell, for further insights.
United States robust Retail Sales data, coupled with strong labour demand and higher consumer price inflation in March, suggest that Fed policymakers may postpone rate cuts later this year.
San Francisco Fed Bank President Mary Daly emphasised that there is no rush to start reducing interest rates, stressing the need to ensure inflation returns to the target rate of 2%. She suggested maintaining restrictive interest rates for a longer period to achieve this goal.
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