Pound Struggles for Support, Euro Faces Economic Uncertainty, and Dollar Gains Momentum
GBP
Sterling is looking for support after a significant drop against the Dollar on Tuesday. The GBP|USD pair faced downward pressure as investors rethought the positive outlook supporting the rise in risk-related assets. Additionally, concerns about a worsening recession and a delicate manufacturing sector within the United Kingdom have made the Pound less attractive. At the time of writing GBP|USD currently sits at 1.2625 and GBP|EUR at 1.1564.
One of the main reasons the Pound performed better than the Dollar at the back end of last year, was the expectation that the Fed would lower interest rates earlier than the Bank of England. However, the less positive outlook for the UK, driven by increasing business pessimism amid a rising cost-of-living crisis, might lead BoE policymakers to rethink their strategy of keeping interest rates high for a long time.
On Tuesday, S&P Global released data indicating a decline in the Manufacturing PMI to 46.2, down from the previous reading of 46.4. This marks the 17th consecutive month of contraction in the Manufacturing PMI. The vulnerability of the UK manufacturing sector persists, influenced by reduced overall demand in both the domestic and international markets, attributed to higher interest rates and an intensifying cost-of-living crisis.
Given the vulnerability of the UK manufacturing sector and escalating concerns about a deepening recession, Bank of England policymakers may reconsider their tight monetary policy stance and initiate discussions about interest rate reductions. The BoE has been advocating for higher borrowing costs for an extended period to ensure a timely return of inflation to the 2% target. Despite significant deceleration in price pressures in the UK economy, they still lag behind the desired rate and are the highest among Group of Seven economies.
Reviewing the data calendar, there is a lack of significant releases anticipated in the UK this week. As a result, investors will turn their attention to the US and Eurozone for market direction.
EUR
The Euro faced initial challenges today, reacting to the news of a rise in German unemployment to 5.9% in December. This data implies a potential ongoing weakening of the Eurozone’s largest economy. Given the gloomy outlook for the Eurozone’s economic future, there’s a possibility that the ECB might consider an earlier-than-expected interest rate cut.
Looking ahead to the rest of the week, German CPI data is scheduled for release at 13:00 GMT tomorrow. The consensus for CPI YoY is 3.8%, compared to the previous 3.2%. Any positive surprise in inflation figures would favour the Euro, as increased inflation could prompt the ECB to maintain rates for an extended period. On Friday morning, German Retail Sales data will be unveiled, with a consensus of -0.5% against the previous -0.1%. Any deviation from the consensus could impact the Euro’s strength accordingly.
USD
Under the weight of widespread strength in the Dollar, GBP|USD faced downward pressure, dropping to its lowest point since mid-December near 1.2600 on Tuesday. Despite an early Wednesday recovery toward 1.2650, the technical outlook suggests that the bearish bias remains steadfast.
The decisive upturn observed in US Treasury bond yields played a pivotal role in propelling the Dollar ahead of its major counterparts on the initial trading day of 2024. Furthermore, the negative shift in market sentiment, mirrored by a decline in US stocks, compelled GBP|USD to remain on the defensive.
The anticipated rise in JOLTS Job Openings for November, forecasted to reach 8.85 million from October’s 8.73 million, could contribute to a resurgence of the Dollar if both figures surpass analysts’ expectations. In the event of mixed data, market participants are likely to await the release of the Federal Reserve’s minutes from the December policy meeting.
During the post-meeting press conference, Fed Chairman Jerome Powell indicated that policymakers were contemplating the appropriate timing for rate cuts. Investors are eager to ascertain whether officials delved into discussions about the schedule for a policy pivot.
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