In recent market developments, our attention has been drawn to the performance of the GBP and Euro against the US Dollar following the US bank holiday on Martin Luther King Day. Initial expectations of a favourable continuation of gains were, unfortunately, not realised, as both currencies saw consistent losses against the USD. The downward trend, notably pronounced with the US market reopening on Tuesday, led to substantial losses for the Pound, reaching its lowest point for the year.
This decline can be attributed, in large part, to the escalating global situation, especially in the Middle East, which is now showing signs of evolving into a broader conflict. While the human consequences of such a scenario are unimaginable, the economic fallout has compelled traders and investors to seek refuge in the safe-haven currency, the USD. This trend is likely to persist should the geopolitical tensions in the Middle East intensify, posing a significant threat to the GBP and EUR against the USD.
Shifting our focus to recent data releases, the past week provided an opportunity to assess the prevailing inflation situations in both the UK and the US, with CPI in the UK and Retail Sales figures in both countries taking centre stage. Beginning with the UK CPI inflation data released on Wednesday, there were expectations of a marginal decrease. However, market murmurs hinted at a potential increase due to elevated energy prices and increased services usage. These murmurs were validated, as the CPI year-on-year came in at 4.0%. While aiding the Pound in recovering some losses from Tuesday, a complete rebound was not achieved, and key rate points remained elusive. Notably, continued challenges in the Middle East affecting shipping routes could potentially drive inflation once again and delay the likelihood of rate cuts.
Subsequently, attention turned to US retail sales data released later on the same Wednesday. Forecasts suggested that core retail sales would align with the previous reading, with an expected 0.1% increase in overall retail sales. However, actual figures defied predictions, with core retail sales rising by 0.2%, and advance retail sales showing significant strength with a 0.3% increase. This unexpectedly robust performance contributed to heightened strength in the USD. Nevertheless, the USD’s advance against the Pound was relatively short-lived, as a swift recovery ensued, and rates settled back to pre-data release levels. Subsequent trading observed relative flatness in the GBP/USD currency pairing, with a range of approximately 50 pips throughout Thursday.
In a surprising turn of events, UK retail sales figures released early the following morning showcased a dramatic drop to -3.2%, surpassing the forecasted -0.5%. This sharp decline, the steepest in three years, raised concerns that the UK would fall into recession towards the latter part of 2023. Despite this significant economic development, the impact on the markets during the morning remained subdued.
Looking ahead, the focus shifts to the US Preliminary Consumer Sentiment figures, set to be released later today. This data is pivotal for the Federal Reserve as a leading indicator of economic health and inflation. A late USD rally may materialise if the forecast figures align accurately. Anticipation is also building for a data-intensive week next week, starting Tuesday, with the BoJ scheduled to announce its latest interest rate decision. The JPY is widely anticipated to emerge as a high-performing currency this year, and any indications of a rate hike or future hikes could potentially result in a robust JPY performance.
The week continues with the release of PMI figures on Wednesday, released in the UK, US, and Eurozone. The UK is expected to witness a decline from its impressive previous services figure. Thursday marks the ECB interest rate decision, where although a hold of current interest rates is highly expected, any commentary from members regarding potential future rate cuts could serve as a flashpoint in the markets. The US is slated to unveil its latest GDP figures later on Thursday, heightening the potential for market volatility.
In conclusion, recent economic events underscore the profound impact of geopolitical tensions on currency markets, with the Middle East situation taking centre stage. The upcoming week promises a wealth of data releases and central bank decisions, setting the stage for dynamic market movements.
