Pound’s Resilience, Euro’s Tussle, and the Dollar’s Balancing Act
GBP
Sterling successfully held its recent gains against its G10 peers, primarily due to diminishing expectations of a potential interest rate cut by the Bank of England. Notably, GBP|EUR strengthened by over 0.5% last week and is currently sitting at 1.1627. After taking a hit at the start of the year, GBP|USD has since recovered and is now sitting at 1.2760 at the time of writing.
A survey on the UK labour market unveiled sustained wage pressures, thus easing concerns of an immediate rate reduction. The KPMG & REC Report on Jobs highlights improved pay growth and a moderate decline in both permanent placements and temporary billings. Despite ongoing economic challenges, the labour market appears to be resilient, offering optimism for a potential upswing for the economy in 2024.
The strong performance of Sterling and the US Dollar is linked to the diminishing prospects of significant rate cuts by both the Federal Reserve and the Bank of England. The Bank of England’s stance emphasises the necessity of a rise in unemployment and a notable wage decline to bring inflation back to the targeted 2.0%. The recent jobs survey reinforces the belief that wages will sustain their upward trajectory, thereby supporting the case for stable inflation.
While the Pound faced challenges in the last quarter of 2023 amid expectations of Bank of England rate cuts, recent evidence has tempered these expectations. Analysts now anticipate a gradual reduction in the Bank Rate throughout 2024.
There’s a lack of any meaningful data coming out of the UK once again this week with the exception of November GDP figures which will be released Friday. Until then, investors and speculators will be looking to the US for market direction.
EUR
The Euro struggled to find its footing today, despite the release of German trade data that surpassed expectations. Imports and exports for November are up 1.9% and 3.7% respectively vs a consensus of 0.2% and 0.3%. This unexpected upturn in German trade resulted in the largest surplus since January 2021.
While last week’s higher-than-expected CPI data fueled speculation of economic expansion, potentially delaying the European Central Bank’s interest rate cuts until the second half of 2024, a contrasting factor comes from a contraction in November’s retail sales data. The dip in retail activity during November is introducing volatility to the Euro, as reduced consumer spending acts as a counterbalance to the otherwise positive EUR sentiment.
We have German Industrial Production for November due tomorrow with the consensus being 0.2% vs -0.4% previous. The data calendar for the remainder of the week is light with the most impactful data being that of German trade, which was released this morning.
USD
The US Dollar maintained relative stability on Monday, following a chaotic ride on Friday. The Dollar Index initially surged after positive numbers in the US Jobs report, only to reverse course and decline sharply due to disappointing Employment figures in the ISM Services PMI report. Alongside the influence of economic data releases, investors and speculators must now reassess the Dollar in light of increasing geopolitical tensions in the Middle East and growing expectations of interest-rate cuts by the Fed.
Market sentiment regarding the Dollar seems divided. Some investors are optimistic about the US Dollar, citing increasing geopolitical tensions in the Middle East, particularly related to ongoing events in the Red Sea and the revelation of Chinese weaponry in Hamas storage facilities by Israel. Conversely, other traders foresee the possibility of swift rate cuts by the Fed, prompted by the recent decline in the ISM numbers last Friday. The trajectory is likely to be influenced by geopolitical developments until further news provides clarity on heightened tensions
On the data front the focus will be on the release of US inflation numbers on Thursday. Consensus excluding Food and Energy MoM and YoY is 0.2% and 3.8% respectively, vs a previous of 0.3% and 4%. Any divergence will lead to more speculation on how soon the Fed will begin to cut interest rates.
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