Monthly Currency Report – March 2023

Friday 31st March – On Friday, the Pound received a boost after the UK’s fourth-quarter GDP surpassed expectations, expanding by 0.1% and exceeding previous estimates that the economy had stagnated. Despite this positive news, the Sterling experienced some downward pressure in the afternoon due to investors repositioning in end-of-quarter trade, causing volatility in the currency market.

 

In contrast, the Euro weakened on the last day of March, following the Eurozone’s latest inflation rate reading. Although core inflation increased as anticipated, headline inflation declined more than predicted.

The US Dollar gained strength, dampening the Euro due to the currencies’ negative trading correlation. Despite a positive market sentiment and softer inflation data, the USD managed to advance on Friday. The US core PCE price index, which is the Federal Reserve’s preferred gauge of inflation, unexpectedly dropped from 4.7% to 4.6%. Nevertheless, the USD moved higher amidst a flurry of currency trading activity.

Thursday 30th March

The Pound saw a surge in value after some positive news regarding the UK’s economic prospects. The Confederation of British Industry (CBI) released a survey indicating that UK businesses anticipate a return to growth in the next three months, marking the first time the poll has shown optimistic expectations since April 2022.

Similarly, the Euro experienced a rally yesterday due to fresh inflation data, which boosted hopes that the European Central Bank (ECB) will continue to raise interest rates. Surprisingly, consumer inflation expectations in the Eurozone climbed, whereas German inflation eased by less than anticipated. The Eurozone’s largest economy’s monthly inflation rate maintained a steady pace of expansion.

Meanwhile, the US Dollar depreciated yesterday, with traders avoiding the safe-haven currency amid the current risk-on sentiment. The expectation that central banks will soon halt the interest rate hikes brought hope to the market, and signs of continuing stability in the financial sector added to the positive mood.

Wednesday 29th March

The Pound experienced little change as the continued lack of data releases left investors directionless. Sterling may have been weighed down by concerns about the UK’s economic outlook following the recent financial market turmoil, with worries about a potential “credit crunch” contributing to bearish sentiment among GBP investors.

Despite a generally positive global market sentiment, EUR investors found some modest cheer as German consumer confidence increased, leading to a strengthening of the Euro. However, the index remained in negative territory, which may have limited potential gains. Additionally, the Euro was trimmed due to its negative correlation with the recovering US Dollar in the afternoon.

The USD remained volatile as investors adjusted their expectations for further policy tightening by the Federal Reserve, with an initially positive market sentiment putting pressure on the safe-haven currency. The USD regained some ground in the second half of the session, as US Treasury yields also rebounded.

Tuesday 28th March

During the trading session, the Pound lacked a clear direction due to the absence of economic releases, which left Sterling vulnerable to external influences. The high levels of food inflation, currently at an 18-year high of 17.5%, may have undermined investor sentiment towards the GBP as it brought the impact of inflation on UK households into focus.

The Euro traded within narrow boundaries against most of its peers, with hawkish remarks from ECB policymakers helping to buoy the common currency. However, despite the positive market sentiment, the Euro was unable to make significant gains. Investors seemed to favour riskier assets despite the weakening of the US Dollar and increased rate hike bets.

The USD struggled to find support on Tuesday, as heightened risk appetite prevented the safe-haven currency from gaining traction. The Federal Reserve’s less hawkish stance has eased global market jitters, and this positive trading sentiment appeared to have prevented the ‘Greenback’ from capitalising on an increase in US consumer confidence.

Monday 27th March

The Pound was boosted by renewed optimism in European markets, leading to a recovery in the banking sector, which had experienced losses during Friday’s selloff. Positive UK retail sales data from the Confederation of British Industry’s (CBI) distributive trades survey also supported the GBP.

Meanwhile, the Euro saw modest gains due to signs of stability in the European banking sector and upbeat German data, but tensions between Russia and Ukraine limited its upward momentum.

The US Dollar struggled to gain traction yesterday as a risk-on mood among investors diminished demand for the safe-haven currency. However, a rally in US Treasury yields provided some support to the ‘Greenback.’ As financial markets continued to stabilise, the Federal Reserve may have more leeway to raise interest rates in the future.

Friday 24th March

At the close of the week, the Pound faced a lack of clear direction amidst a mixed bag of economic data from the UK. Although retail sales surpassed expectations, recording a growth of 1.2% compared to the anticipated 0.2%, sales volumes for the past three months decreased up to February. The PMI reports for the UK also fell more than predicted, yet the services sector remained in a state of expansion.

The Euro suffered due to a fresh selloff in the European banking sector on Friday. Just as the market had appeared to stabilise, another selloff occurred, particularly affecting Germany’s largest bank, Deutsche Bank.

Consequently, the safe-haven US Dollar (USD) strengthened towards the end of last week’s trade. However, the USD’s gains dwindled during Friday’s second half when there was an unexpected contraction in US durable goods orders.

Thursday 23rd March

The Pound experienced fluctuations, with sideways movements being the overall trend, after the Bank of England (BoE) increased interest rates by 25bps. While the BoE hinted that this may be the last rate hike, they did not dismiss the possibility of another increase in May, leading to mixed messaging and causing the Pound to remain undecided, without any significant downside.

In contrast, the Euro had a slow start in yesterday’s trade, lacking any fundamental drivers to prompt movement throughout the morning. It was not until the afternoon when Eurozone consumer confidence unexpectedly dropped, causing a slight dip in the EUR. The recent banking sector turmoil was a factor, spooking consumers and resulting in the first morale drop since September.

Meanwhile, the safe-haven US Dollar managed to tick higher yesterday, reclaiming some of its post-Federal Reserve losses amidst the downbeat market mood. Nevertheless, the upside remained significantly limited as the Fed’s dovish stance kept a firm cap on the ‘Greenback.’

Wednesday 22nd March

The Pound initially surged higher following a surprise increase in UK inflation, which raised the likelihood of another interest rate hike from the Bank of England (BoE) today. However, Sterling later surrendered these gains, seemingly due to a market correction.

On the other hand, the Euro was buoyed by hawkish remarks from European Central Bank (ECB) policymakers. ECB President Christine Lagarde expressed concerns about high inflation levels and hinted at possible rate hikes. Meanwhile, her colleague Joachim Nagel was even more assertive, stating that “Our fight against inflation is not over.”

Conversely, the US Dollar was relatively subdued yesterday, as investors refrained from making aggressive bets ahead of the Federal Reserve policy decision. While the Fed increased rates by 25bps as expected, they also noted the recent banking sector turmoil, which could lead to tighter credit conditions. This prompted the market to lower its expectations for further hikes, causing the USD to slide.

Tuesday 21st March

GBP investors grew cautious ahead of the Bank of England (BoE) policy decision tomorrow, leading to some selling pressure on the Pound. Concerns about the possibility of the bank ending its tightening cycle weighed on Sterling. However, renewed confidence in European markets helped the Pound firm against its weaker rivals.

Meanwhile, as European financial markets continued to stabilise yesterday, the Euro surged higher, bolstered by bets on further rate hikes from the European Central Bank (ECB). ECB policymaker Pablo Hernandez de Cos also called for more hikes, adding to the single currency’s upside.

In contrast, the US Dollar strengthened during the latter part of yesterday’s session, shrugging off an upbeat market mood that had dampened the safe-haven currency earlier. As the recent turmoil in the US banking sector receded, expectations of another Federal Reserve rate hike and rising US Treasury yields lifted the ‘Greenback’.

Monday 20th March

At the start of this week, the Pound gained ground as positive sentiment in European markets lifted the relatively risk-tolerant Sterling. The Bank of England (BoE) sought to assure investors that the UK’s banking system remained stable and sound, contributing to the relief in the market and supporting the Pound.

Meanwhile, the Euro also benefited from the improved tone in European markets yesterday, as investors appeared reassured by UBS’s acquisition of the struggling Credit Suisse. However, remarks made by European Central Bank (ECB) President Christine Lagarde, which suggested that the recent market volatility may reduce the need for further interest rate hikes, may have tempered the Euro’s gains.

The US Dollar was weakened by a more upbeat market sentiment yesterday, as risk appetite grew and investors became less inclined to seek the safe-haven currency. The prospect of the Federal Reserve keeping interest rates unchanged at its upcoming policy meeting also added to the downward pressure on the Greenback.

Friday 17th March

On Friday, the Pound experienced fluctuations in response to global financial market volatility, compounded by the absence of UK economic data. Despite investor anxiety, Sterling managed to make gains against its riskier counterparts.

Meanwhile, the Euro experienced mixed movement as a result of hawkish comments from several European Central Bank (ECB) officials, which supported the currency. However, concerns over the banking sector in Europe hindered its potential rise.

Initially, the US Dollar increased in value during Friday’s European session as the market mood soured. However, the currency lost some of its gains after an unexpected decrease in US consumer confidence in the afternoon.

Thursday 16th March

On Thursday, the Pound lacked clear direction due to the absence of economic releases, making it vulnerable to shifting investor sentiment. Additionally, GBP investors adjusted their expectations for Bank of England (BoE) interest rates, with a 50/50 chance of a rate pause priced into the markets.

The Euro experienced fluctuations, with the European Central Bank (ECB) providing moderately dovish forward guidance after the expected 50 basis point rate hike. ECB President Christine Lagarde emphasised the need for a data-driven approach, reflecting recent turmoil in the banking sector in Europe and beyond.

Initially, the safe-haven US Dollar rallied on Thursday morning as a result of a cautious market mood. However, the currency later lost these gains as US Treasury bond yields began to decrease.

Wednesday 15th March

The Pound had a wide trading range due to mixed forecasts from the Office for Budget Responsibility (OBR) that accompanied the Chancellor’s Spring Budget. Although the UK may avoid a technical recession, the OBR warned that living standards could still see a record decline. The fear of a potential collapse in the European banking sector created turmoil in the currency markets, further contributing to the mixed movement of Sterling.

The Euro experienced a decline during Wednesday’s session as the Credit Suisse selloff caused a ripple effect throughout the markets. Concerns over financial instability in Europe placed particular pressure on the Euro ahead of today’s European Central Bank (ECB) meeting.

Meanwhile, the safe-haven US Dollar rallied due to the banking sector turmoil, with skittish investors seeking refuge in the currency. However, the gains of the ‘Greenback’ were moderate as investors lowered their expectations for a Federal Reserve interest rate hike next week, in light of the chaos in the financial sector.

Tuesday 14th March

The Pound lacked support as evidence emerged that wage growth had started to slow in January, reaching 5.7% over the past three months. This suggests that the Bank of England’s (BoE) rate hikes may be starting to have an impact, causing investors to lower their expectations of further hikes and leaving Sterling flat.

Meanwhile, the Euro experienced fluctuations but remained supported by hopes for hawkish forward guidance from the European Central Bank (ECB). Despite a lack of significant gains, the Euro likely received some support due to the negative correlation with a weaker US Dollar.

The US Dollar decreased against most major currencies following the release of data showing a decline in both core and headline inflation. Although there was a monthly increase in core inflation in February, the ‘Greenback’ was unable to take advantage of this. Moreover, with the precarious situation of the banking sector in the US, bets on Federal Reserve rate hikes were lowered.

Monday 13th March

The Pound had a mixed performance in the currency markets as a risk-on sentiment saw it decline against its riskier peers but increase against safer currencies. There were concerns among GBP investors about the stability of the UK’s financial system, but HSBC’s acquisition of Silicon Valley Bank (SVB) UK helped alleviate these worries to some extent.

Despite the negative correlation between the Euro and the weakening US Dollar, the common currency struggled to find a clear direction due to the optimistic market mood. Investors also appeared cautious ahead of the upcoming European Central Bank (ECB) interest rate decision.

The US Dollar experienced fluctuations as it continued to lose support from Federal Reserve rate hike bets following SVB’s collapse. The failure of SVB was linked to the rapid increase in US interest rates over the past year, and the signs of financial strain could make the Fed reconsider raising borrowing costs again next week.

Friday 10th March

After an eventful week, the British Pound (GBP) made a strong comeback, largely thanks to better-than-anticipated UK GDP figures. The economy grew by 0.3% in January, exceeding the predicted 0.1%. This positive development not only raised hopes that the UK may avoid a recession in 2023, but also increased the likelihood of a Bank of England (BoE) interest rate hike.

While the Euro (EUR) remained stable in the morning, following unremarkable German inflation data, it experienced a surge in the afternoon. The Euro’s negative correlation with the weakening US Dollar (USD) was the primary factor behind its strengthening. The USD had fallen sharply earlier in the day when US jobs data disappointed investors. The non-farms payrolls report surpassed expectations, but an increase in the unemployment rate and a decline in monthly wage growth diminished the prospects of a Federal Reserve rate hike.

The safe-haven USD attempted to recover from its losses against weaker currencies later on. The market disruption caused by the collapse of Silicon Valley Bank made the USD an appealing investment. However, this development also diminished the chances of more aggressive rate hikes from the Fed.

Thursday 9th March

The British pound (GBP) made a strong recovery after reaching oversold conditions due to a sharp decline following Federal Reserve Chair Jerome Powell’s hawkish testimony on Tuesday. Despite negative domestic headlines and a souring market mood, the pound was able to overcome these obstacles, potentially due to expectations of more interest rate hikes from the Bank of England (BoE).

On the other hand, concerns over the Russia-Ukraine situation and mixed messages from European Central Bank (ECB) policymakers initially dampened the Euro’s (EUR) performance yesterday. However, as the session progressed, the EUR was able to rise against some of its peers, benefiting from its negative correlation to a weakening US Dollar (USD).

Meanwhile, the USD continued to weaken during yesterday’s trading session, losing its post-Powell gains as the effects of a more hawkish Fed began to fade. The “Greenback” further extended its losses in the afternoon, as initial jobless claims rose to a two-and-a-half-month high, suggesting a possible softening in the labour market. This, in turn, dampened expectations of Fed rate hikes.

Wednesday 8th March

The trading session today saw the British pound (GBP) struggle due to the scarcity of British economic data. Despite a slight increase in risk appetite, the pound faced pressure from dovish comments made by Bank of England (BoE) policymaker Swati Dhingra.

The Euro (EUR) experienced volatile trading, fluctuating after upbeat German data was offset by a downward revision to Eurozone GDP growth in the fourth quarter of 2022. However, the EUR was able to stabilise and strengthen during the afternoon, possibly due to a pullback in the US Dollar (USD), as the common currency has a negative correlation with the USD.

Despite stronger-than-expected US employment data, the USD weakened during yesterday’s trading session, as profit-taking took hold. Nevertheless, USD exchange rates remained close to multi-month highs, with markets still betting on a 50bps hike from the Federal Reserve in two weeks’ time.

Tuesday 7th March

The Pound (GBP) faced challenges due to renewed concerns about the UK’s economic outlook. The British Retail Consortium (BRC) released new sales data, indicating ongoing difficulties for UK firms, which weighed on the GBP. Moreover, in the afternoon, the possibility of higher US interest rates caused further obstacles for Sterling, leading to further declines.

In contrast, the Euro (EUR) received support in the morning after unexpectedly positive German factory order data was released. However, the USD’s strength in the afternoon put pressure on the EUR. Nonetheless, amid a negative market sentiment, the EUR was able to outperform against its riskier peers.

On the other hand, the USD surged yesterday following Federal Reserve Chair Jerome Powell’s testimony to Congress, which was more hawkish than expected. Powell hinted at a faster pace of interest rate hikes in the future, leading to an increase in market bets on a half-point hike later in the month. Consequently, the odds of a 50bps move rose to 70%, causing the USD to soar higher.

Monday 6th March

The Pound (GBP) was mixed due to a lack of significant UK economic data, which caused Sterling to trade without a clear directional bias. However, GBP managed to gain modestly against some of its weaker peers, possibly influenced by the recent agreement of a new Northern Ireland protocol deal.

In contrast, the Euro (EUR) strengthened yesterday, disregarding some underwhelming data from the Eurozone. Retail sales in the bloc only rose by 0.3% in January, lower than the expected 1% rise. However, the positive sentiment came after hawkish comments from two European Central Bank (ECB) policymakers. Chief Economist Philip Lane stated that the bank would raise rates again in May, while his colleague Robert Holzmann called for four more consecutive 50bps rate increases.

The US Dollar (USD) performed well at the beginning of yesterday’s session as the market’s pessimistic mood boosted the safe-haven currency’s appeal. Nevertheless, the USD later trimmed its gains as the market mood improved, and there was a significant reduction in US factory orders.

Friday 3rd March

On Friday, the Pound (GBP) strengthened as the final PMI results for the UK surpassed initial estimates. The services sector, responsible for 80% of the country’s economic output, expanded at a rate not seen since June 2022, raising hopes that the UK may avoid a recession this year.

In contrast, the Euro (EUR) stumbled initially due to disappointing data from the Eurozone, with the final PMI coming in lower than expected. The European Central Bank (ECB) rate rise bets were dampened further by a contraction in the monthly producer price index, though hawkish comments from multiple ECB officials helped the currency recover some of its losses. Overall, EUR remained mostly stagnant.

The US Dollar (USD) fluctuated throughout Friday’s session, with conflicting factors pulling it in different directions. On the one hand, Federal Reserve rate hike bets supported the currency, but on the other hand, a risk-on market mood offset some of those gains. The latter eventually won out, as increasing risk appetite caused the USD to decline in the evening. A strong US services PMI failed to provide lasting gains, though it may have contributed to traders’ positive sentiment.

Thursday 2nd March

Investors scaled back their expectations of further rate hikes, causing the Pound (GBP) to continue its slide. In a speech, BoE Chief Economist Huw Pill acknowledged a “stronger than anticipated” economy, but failed to inspire confidence in the currency.

Meanwhile, the Euro (EUR) weakened as the latest Eurozone CPI flashes revealed a drop in headline inflation to 8.5% in February. However, the currency was cushioned against further losses by rate hike bets, which were underpinned by core inflation printing at 5.6%.

On the other hand, the US Dollar (USD) managed to make a slight recovery on Thursday, thanks to the latest initial jobless claims data. The report, which showed the US labour market remained hot with 190,000 claims for the week ending 25 February, fueled Federal Reserve rate hike bets.

Wednesday 1st March

The Pound (GBP) experienced a decline in value after Bank of England (BoE) Governor Andrew Bailey’s notably dovish speech. Bailey implied that interest rates may have reached their peak and stressed the need for a data-driven approach. In response, investors betting on higher rate hikes sold Sterling aggressively, leading to a decline in its value.

On the other hand, the Euro (EUR) strengthened yesterday, driven by Germany’s inflation data for February. Headline inflation unexpectedly remained at 8.7%, leading to heightened rate hike bets. Coupled with the upticks in inflation in France and Spain, the data placed further pressure on the European Central Bank (ECB).

The US Dollar (USD) struggled for support yesterday, as the February ISM manufacturing PMI came in at 47.7, below the forecast of 48. This reflected a slowdown in the manufacturing sector, which led to concerns about the future of economic growth and the condition of the US economy.

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