Uncertainty seems to be a prevailing theme across various sectors of life, and the currency markets are no exception. The landscape has become increasingly complex as investors attempt to decipher the intentions of central banks regarding potential rate cuts. As a result, market volatility is at a heightened level.
After several months of Sterling strength, during which rates consistently reached multi-year highs, the situation now appears to be shifting. The British pound has lost significant ground against the U.S. dollar for the second consecutive week, suggesting that the rally may be losing steam.
From a data perspective, it was a relatively quiet week for the UK. As is often the case, U.S. data dominated the market focus. The first major release of the week came in the form of the FOMC minutes. Market expectations were centred around a more proactive Federal Reserve moving forward. The key takeaway was that while the Fed made a majority decision to cut rates by 50 basis points, it was not a unanimous decision. This suggests that we may now expect decisions to remain data dependent.
On Thursday, U.S. CPI data was released, following the FOMC minutes and adding to speculation about future rate cuts. However, the release turned out to be underwhelming. All three figures came in slightly above forecasts, with year-over-year inflation reported at 2.4%, down from 2.5% but marginally above the forecast of 2.3%. Federal Reserve officials were quick to downplay this overshoot, maintaining expectations of a rate cut in November.
This morning, the UK released its only major data of the week—GDP figures. The data was expected to show that the UK economy returned to growth after two months of stagnation. The actual figure met expectations at 0.2%, and the market impact was limited as this had largely been priced in. Later today, the U.S. will release PPI data, which is expected to show a slight decline from previous readings, likely leading to minimal market movement.
Looking ahead, next week will see key economic releases in the UK, Eurozone, and U.S. In the UK, the focal point will be CPI data on Wednesday, with expectations that figures will remain in line with the previous reading, potentially fuelling expectations of a slower rate path. Thursday will be pivotal, with U.S. retail sales data set for release. This will be a key indicator as markets assess the likelihood of a Fed rate cut in November. One thing to note: it’s never wise to bet against the American consumer. To close out the week, the ECB will convene to make its latest interest rate decision, with a cut widely anticipated. As a general statement for the week, I expect the GBP/USD exchange rate to drop further, though the GBP/EUR rate may remain stable, with potential for gains in the second half of the week.