Monthly Currency Report – May 2023

Friday 26th May– The Pound received initial support due to positive market sentiment and better-than-expected UK retail sales data, resulting in a rise in the value of Sterling. However, the Pound’s gains against its safer counterparts diminished in the afternoon, as market sentiment turned negative.

 

Meanwhile, the Euro stumbled towards the end of the previous week, triggered by comments from Philip Lane, the Chief Economist of the European Central Bank (ECB). Lane expressed his expectation of a decline in food inflation and predicted that the recent decrease in energy prices would eventually impact core inflation. These remarks dampened expectations of an ECB rate hike and exerted pressure on the Euro.

At the beginning of Friday’s European session, the US Dollar weakened as risk appetite improved, leading to reduced demand for the safe-haven currency known as the ‘Greenback’. However, the USD managed to regain strength during the latter half of the session. This recovery followed the unexpected increase in the US core PCE price index, which is the Federal Reserve’s preferred measure of inflation. Market participants interpreted this as a sign of a potentially more hawkish stance from the Fed, consequently boosting the value of the US Dollar.

Thursday 25th May

The Pound found support from expectations of future interest rate hikes by the Bank of England (BoE), as investors started pricing in more rate increases beyond the anticipated 25 basis points rise in June. Despite a lack of significant economic data and a risk-off sentiment, these bets on higher rates provided a foundation for the strength of the British currency.

In contrast, the Euro faced difficulties yesterday, triggered by news of Germany’s entry into a technical recession during the previous winter. The final GDP figures revealed a 0.3% contraction in the first quarter of 2023, marking the second consecutive quarter of negative growth. This raised concerns among EUR investors about the well-being of the largest economy in the Eurozone.

Meanwhile, the US Dollar continued its upward trajectory as the deadline for the US debt ceiling approached. Worries about the potential global economic repercussions of a debt default soured market sentiment, leading to increased demand for the safe-haven US Dollar. Additionally, positive economic data from the United States may have provided further support to the USD’s strength.

Wednesday 24th May

The Pound experienced brief gains following the release of the latest consumer price index data, which exceeded expectations. While headline CPI showed a significant decrease to 8.7%, the focus shifted to core inflation, which reached a 31-year high of 6.8%. This surge in core inflation bolstered expectations of a Bank of England (BoE) interest rate hike. However, Sterling’s sentiment later turned negative amidst a gloomy market mood.

In contrast, the Euro demonstrated strength yesterday, despite facing a strong US Dollar and lacklustre German economic data that limited its potential. The Ifo business climate index for May fell below forecasts, declining from 93.6 to 91.7. This indicated a decline in optimism within the Eurozone’s largest economy, potentially making EUR investors more cautious.

During yesterday’s European session, the US Dollar made gains as concerns over US debt ceiling negotiations persisted. However, the release of the latest Federal Open Market Committee (FOMC) minutes may have tempered these gains. The minutes revealed a growing divergence in support for further tightening measures, potentially impacting the strength of the USD.

Tuesday 23rd May

The Pound experienced limited trading activity against most of its counterparts, as lacklustre private indexes dampened market sentiment. Both the services and manufacturing indexes fell below expectations, indicating a slowdown in the private sector. However, the pressure on the Pound was later eased by an improved economic forecast from the International Monetary Fund (IMF).

On the other hand, the Euro gained some support yesterday due to its perceived safety in the risk-averse market environment. However, these gains were undermined by discouraging PMI readings, suggesting a slowdown in the Eurozone’s private sector in May.

The US Dollar pared back its initial gains yesterday, following the release of the latest US PMIs, which revealed a growing divergence in the private sector. While the service index in the US reached a 13-month high, the manufacturing index declined further and entered contractionary territory.

Monday 22nd May

The Pound struggled to find a clear direction as the absence of significant economic releases left Sterling vulnerable to market forces. However, the possibility of future rate hikes may have provided some support to the GBP, cushioning its performance. Investors eagerly awaited the inflation data scheduled for Wednesday, which would likely shape expectations for further interest rate increases.

The Euro received some support from hawkish comments made by policymakers at the European Central Bank (ECB) today. ECB President Christine Lagarde emphasised their commitment to controlling inflation. Nevertheless, concerns surrounding the US debt ceiling prevented the Euro from fully capitalising on these gains.

The US Dollar experienced mixed fortunes yesterday due to ongoing negotiations regarding the US debt ceiling, which continued to weigh on market sentiment. While recent discussions have been described as “productive,” the approaching deadline of June 1st added to the apprehension. The failure to reach a solution could potentially trigger a crisis in the US economy. Consequently, this anxiety limited the demand for the USD.

Friday 19th May– On Friday, the Pound received renewed support and managed to recover some of its earlier losses. This was driven by a rise in UK government bond yields to a seven-month high, indicating increasing expectations for more interest rate hikes by the Bank of England (BoE).

The Euro received a boost at the end of the week due to hawkish comments from European Central Bank (ECB) policymakers. ECB President Christine Lagarde expressed the bank’s determination to combat inflation, while rate setter Isabel Schnabel emphasized their resolute action.

The US Dollar retreated on Friday, experiencing profit-taking after reaching multi-month highs. The currency was also affected by a positive market sentiment, which reduced demand for safe-haven assets. Additionally, comments from Federal Reserve Chair Jerome Powell further contributed to the USD’s decline. Powell suggested that interest rates might not need to increase as much as previously anticipated, leading to a revision of expectations for another rate hike next month.

Thursday 18th May

The Pound showed mixed movement on Thursday, weakening against stronger currencies due to a lack of UK economic data. However, comments from Bank of England (BoE) officials provided some limited support to Sterling, cushioning its losses. BoE Governor Andrew Bailey reiterated concerns about the potential secondary effects of inflation, which increased speculation of more interest rate hikes.

The Euro remained subdued during Thursday’s session, partly due to thin trading conditions caused by the Ascension Day public holiday. Dovish comments from European Central Bank (ECB) Vice-President Luis de Guindos might have also contributed to the EUR’s weakness. De Guindos suggested that the bank was nearing the end of its tightening cycle.

Speculation of continued interest rate hikes by the Federal Reserve boosted the US Dollar on Thursday, leading the US Dollar index to reach a two-month high. Several Fed rate setters indicated the possibility of future rate increases, and better-than-expected jobless claims data further supported the USD. Additionally, US Treasury yields, which often reflect market expectations of Fed actions, reached their highest levels since March.

Wednesday 17th May

The Pound initially declined on Wednesday due to concerns following disappointing UK jobs data released the previous day. However, comments from Bank of England (BoE) Governor Andrew Bailey later provided support to Sterling. Bailey acknowledged that rising wages could lead to sustained inflation, potentially necessitating more rate hikes from the BoE.

The Euro weakened on Wednesday after Eurozone inflation data came in softer than expected. Although the annual inflation figure matched preliminary estimates, the month-on-month rate cooled more than anticipated. The common currency also suffered from its negative correlation with the US Dollar (USD), as USD strength reduced demand for the Euro.

The US Dollar experienced initial success on Wednesday. As a safe-haven currency, it benefited from a pessimistic market sentiment and higher US Treasury yields, which remained near a two-week high. However, as the day progressed, improved risk sentiment trimmed the USD’s gains. Nonetheless, the rise in Treasury yields prevented significant losses for the US Dollar.

Tuesday 16th May

The Pound faced a setback on Tuesday due to below-forecast jobs data. UK unemployment unexpectedly increased, and earnings growth fell short of expectations. Although Sterling recovered somewhat from its lowest levels, it continued to trade with modest losses throughout the European session.

The Euro encountered headwinds at the beginning of Tuesday’s session. Germany’s latest economic sentiment index declined more than forecasted, raising concerns about a recession in the Eurozone’s largest economy. However, despite the negative sentiment, the Euro remained resilient against riskier currencies. Positive employment data also provided some support to the single currency.

The US Dollar initially declined but managed to regain ground on Tuesday, despite weaker-than-expected US retail sales data. A pessimistic market sentiment supported the safe-haven currency, and hawkish comments from the Federal Reserve’s Loretta Mester further bolstered the USD.

Monday 15th May

The Pound strengthened on Monday as an optimistic market sentiment boosted the UK currency, which is increasingly sensitive to risk factors. Expectations for positive jobs data scheduled for the following day also played a role in the Pound’s success. Economists predicted an increase in wage growth, leading traders to speculate on further action from the Bank of England (BoE) to prevent inflation from rising further.

The Euro faced early pressure on Monday after data revealed a significant 4.1% contraction in Eurozone industrial production in March. However, forecasts from the European Commission (EC) helped mitigate the currency’s losses. The EC upgraded its growth and inflation projections, indicating a potential need for the European Central Bank (ECB) to raise interest rates.

The US Dollar weakened on Monday as investors displayed a renewed appetite for risk, causing the safe-haven currency to lose ground. Additionally, comments from the Federal Reserve’s Raphael Bostic may have contributed to the USD’s decline. Although Bostic is not a voting member this year, his remarks indicated a preference for a pause in monetary policy if he were in a position to decide.

Friday 12th May– On Friday, the Pound struggled to determine its path amid a mix of UK GDP data. While the UK economy experienced a modest growth of 0.1% in the first quarter of this year, raising hopes of averting a recession, the unexpected contraction of 0.3% in March tempered the optimism.

In the absence of Eurozone data, the Euro weakened against several currencies towards the end of the previous week. The Euro faced lingering challenges due to the European Central Bank’s (ECB) interest rate decision and recent discouraging data, compounded by its negative correlation with a strengthening US Dollar.

After a slow start, the US Dollar ultimately gained ground on Friday, as traders sought refuge in the safe-haven currency amidst a prevailing risk-off sentiment in the markets. The market sentiment was further dampened by underwhelming US data in the afternoon, which provided additional support for USD exchange rates.

Thursday 11th May

Yesterday, the Pound experienced a significant shakeup due to the interest rate decision by the Bank of England (BoE). Despite the bank’s decision to raise rates by 25 basis points and indicate the possibility of future hikes, the Pound stumbled against many other currencies. The downward movement was primarily triggered by remarks made during the post-decision press conference. BoE Governor Andrew Bailey expressed the bank’s expectation of a sharp decline in inflation starting in April, casting doubt on the likelihood of further interest rate increases.

Meanwhile, the Euro enjoyed some success as Eurozone consumer inflation expectations rose, increasing the likelihood of rate hikes by the European Central Bank (ECB). Furthermore, a risk-off sentiment prevailing in the markets contributed to the Euro’s strengthening against riskier currencies.

In line with this risk aversion, the US Dollar rallied as traders sought refuge in the safe-haven currency. The USD’s upside was further supported in the afternoon by an increase in producer price inflation. However, the gains of the US Dollar may have been limited by a surge in jobless claims.

Wednesday 10th  May

The Pound experienced a slight softening following an initial positive movement, as the absence of significant UK economic data exposed the currency to potential losses. Nevertheless, the downside was mitigated by expectations of another interest rate hike by the Bank of England (BoE) scheduled for today, which prevented a more pronounced decline in the value of the UK currency.

The Euro remained stagnant during the day, unable to regain its recent losses, as mixed signals from the European Central Bank (ECB) created uncertainty.

While some policymakers indicated the potential necessity for future rate hikes, they also hinted that the bank was approaching the end of its tightening cycle. Furthermore, one ECB official even discussed the possibility of rate cuts next year.

The release of the latest US consumer price index triggered significant volatility in the US Dollar on that day. Initially, the USD experienced a decline as headline inflation in the United States unexpectedly cooled. However, the ‘Greenback’ managed to recover from this immediate reaction and traded sideways overall.

Tuesday 9th May

The Pound strengthened as market sentiment remained optimistic about the UK currency in anticipation of the upcoming Bank of England (BoE) interest rate decision scheduled for tomorrow. Investors have factored in a 25 basis points rate hike, and some analysts even anticipate the BoE delivering two additional rate increases during the summer. These expectations buoyed GBP exchange rates.

On the other hand, the Euro had a subdued performance yesterday due to its negative correlation with a stronger US Dollar. Furthermore, the Euro faced ongoing challenges following the European Central Bank’s (ECB) rate decision the previous week, which continued to weigh on the currency. However, despite these headwinds, the safer Euro managed to hold its ground against riskier currencies amid a gloomy market sentiment.

Meanwhile, the US Dollar experienced an ascent as investors sought refuge in the safe-haven currency amidst a risk-off atmosphere in the market. Investor nervousness arose from a congressional stalemate over whether to raise the US debt ceiling, with the deadline approaching for a potentially “catastrophic” debt default. Paradoxically, this situation lent support to the safe-haven US Dollar.

Monday 8th May

Towards the end of the previous week’s session, the Pound displayed a mixed performance as the absence of significant UK data led its trading to be influenced by market sentiment. A risk-on sentiment among investors propelled the Pound to rise against safer currencies, but it faced losses against other counterparts.

On Friday, the Euro weakened, initially impacted by concerning data from Germany. The Eurozone’s largest economy witnessed a substantial 10.7% decline in factory orders in March, far worse than the anticipated 2.2% contraction. Further disappointing data emerged later in the morning for the Eurozone, as retail sales in the bloc contracted more than expected, exerting additional pressure on the Euro.

The US Dollar experienced a decline on Friday, even though the jobs data surpassed forecasts and briefly boosted the ‘Greenback’. USD investors appeared unimpressed as the non-farm payrolls figure for April, while exceeding expectations, was revised significantly lower for March. Simultaneously, mounting concerns about a potential banking crisis in the United States led to a reduction in expectations for further interest rate hikes by the Federal Reserve. This diminished the appeal of the USD.

Friday 5th May

Last week’s trading session saw the Pound experience mixed movement due to the lack of UK data, leading to its performance being tied to market sentiment. While a risk-on sentiment pushed the Pound up against its safer counterparts, it lost ground against other currencies.

The Euro weakened on Friday, initially due to troubling German data as factory orders slumped by 10.7% in March, far worse than the anticipated 2.2% contraction. Subsequently, more disappointing data was released as retail sales in the Eurozone shrank more than expected, adding to the pressure on the single currency.

On the other hand, the US Dollar softened on Friday, despite an initial spike in response to better-than-expected jobs data for April. USD investors remained unimpressed as March’s result was revised considerably lower. Additionally, mounting concerns of a US banking crisis caused markets to lower their expectations for more Federal Reserve interest rate increases, reducing USD’s appeal.

Thursday 4th May

Despite stronger-than-expected UK services PMI data providing some support, the Pound experienced mixed performance yesterday as it faced bearish market sentiment that put pressure on the increasingly risk-sensitive currency. This resulted in GBP losing ground against some of its safer counterparts.

The Euro also slumped yesterday, after the European Central Bank (ECB) announced a smaller 25 bps interest rate increase, slowing its pace of policy tightening. Even hawkish comments from ECB President Christine Lagarde failed to stop the losses as EUR plunged.

The US Dollar saw fluctuations yesterday, as it managed to recover some of its overnight losses against weaker peers. This came after the Federal Reserve hinted at a pause in its tightening cycle on Wednesday evening. However, USD found support as a risk-off sentiment emerged, making it a safe-haven currency.

Wednesday 3rd May

The Pound saw gains against several of its peers, although the exact cause of this movement was unclear. Sterling may have been supported by expectations of another Bank of England (BoE) interest rate increase and a market mood that favoured risk-on sentiment.

The Euro saw a slight increase against some of its counterparts yesterday following a surprising drop in the Eurozone’s unemployment rate to a new record low. However, the currency’s gains were limited as investors remained cautious ahead of the European Central Bank (ECB) and Federal Reserve interest rate decisions.

Meanwhile, the US Dollar weakened during yesterday’s European trade, as investors showed hesitation ahead of the Federal Reserve decision and favoured risk-on sentiment, leading them to steer clear of the safe-haven currency. As expected, the Fed raised rates by 25bps during its meeting, but hinted that this may be the final increase in its current hiking cycle, causing USD to decline against several of its counterparts.

Tuesday 2nd May

The Pound saw a decline against many of its peers, despite the final manufacturing PMI in the UK printing higher than preliminary estimates. Although the survey exceeded expectations, it still revealed that the UK’s factory activity remained in a state of contraction last month. Furthermore, the data indicated that price pressures were easing, which dampened the likelihood of Bank of England (BoE) interest rate increases.

The Euro experienced mixed trading yesterday due to a consumer price index that lacked a clear direction. Although headline inflation slightly increased, core inflation unexpectedly eased, creating uncertainty surrounding the European Central Bank’s (ECB) upcoming interest rate decision. Nevertheless, the safer single currency was able to gain against its riskier peers as market anxiety increased later in the session.

The US Dollar gained ground yesterday as a pessimistic market sentiment prompted traders to prefer the safe-haven currency. However, USD’s gains were limited later in the session as job vacancies experienced a larger-than-anticipated decline, which indicated a cooling US labour market. Consequently, markets trimmed their expectations for further Federal Reserve rate hikes following tonight’s meeting.

Currency Ranges for the month:

GBP/USD: Low: 1.12737  High: 1.26742

GBP/EUR: Low: 1.12722  High: 1.16495

EUR/USD: Low: 1.06374 High: 1.12114

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