Currencies Direct – Currency Outlook

Euro bolstered by hawkish ECB, US dollar slumps on Fed rate cut bets

Euro

EUR/GBP: Down from £0.87 to £0.86

EUR/USD: Unchanged at $1.09

The euro traded in a wide range over the past month, in response to fluctuating expectations for European Central Bank (ECB) monetary policy in 2024.

As we transitioned into December, a weaker-than-expected Eurozone inflation print sparked speculation that the ECB may start cutting interest rates early next year, which dragged on EUR exchange rates.

Underwhelming German data stoked fears that the Eurozone’s largest economy may slip into a recession, which acted as a headwind for the single currency through the first half of December.

The euro then rebounded in the middle of the month as the ECB kept interest rates on hold and ECB President Christine Lagarde dismissed speculation that the bank was discussing rate cuts.

The single currency maintained this positive trajectory in the run-up to Christmas following hawkish speeches from several ECB policymakers which saw them also push back on rate cut speculation.

As we enter 2024, EUR investors will be keeping a close eye on key Eurozone data releases for December, with the bloc’s latest inflation and PMI figures likely to inform ECB monetary policy at the bank’s January meeting.

Pound

GBP/EUR: Up from €1.14 to €1.15

GBP/USD: Up from $1.24 to $1.26

The pound raced higher as November ended following a series of hawkish remarks from Bank of England (BoE) policymakers.

This upside in Sterling was reinforced by some surprisingly upbeat UK PMI releases, which helped to ease fears of a winter recession.

Limited UK data then left the pound directionless through the first half of December, while a dovish tilt to a speech from BoE Governor Andrew Bailey also limited GBP demand.

A mixed UK jobs report, coupled with a surprise contraction in UK GDP in October, exerted some pressure on Sterling in mid-December, before GBP exchange rates soared on the back of the BoE’s final policy decision of the year.

While the BoE left rates on hold as expected, the pound rallied as the bank sought to firmly dispel rate cut speculation.

However, a much sharper-than-expected cooling of inflation weakened BoE expectations and slashed Sterling’s gains.

Sterling may maintain a similarly positive trajectory in January, assuming that BoE officials continue to push back on rate cut speculation. Although underwhelming UK data may continue to limit the pound’s potential.

US Dollar

USD/GBP: Down from $0.80 to $0.78

USD/EUR: Unchanged at €0.91

Trade in the US dollar has been notably volatile over the past month amid fluctuating expectations for when the Federal Reserve will begin cutting interest rates.

At the end of November, we saw USD exchange rates falter as mixed US PMIs bolstered Fed rate cut speculation.

But the US dollar was quick to recover at the start of December as stronger-than-expected US GDP and signs of sticky inflation helped to deter rate cut bets.

The ‘greenback’ found further support from the latest US non-farm payrolls report, as a larger-than-expected increase in US job creation also saw investors rein in rate cut expectations.

However, USD then plunged to multi-month lows in the wake of the Fed’s final interest rate decision of the year due to notably dovish comments from Fed Chair Jerome Powell.

While Fed policymakers have sought to push back against rate cut speculation, the odds of a March rate cut now sit at around 75%. Unless something changes this narrative, this could see the US dollar remain on the back foot through January.

 

 

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