Weekly market analysis: US dollar surges higher on jobs data, Pound rocked as BoE warns of recession

Philip McHugh August 8th 2022 - 3 minute read

After initially strengthening, the pound then shed its gains last week as the Bank of England (BoE) warned of an impending UK recession.

Meanwhile, the US dollar traded in a wide range, rallying at the end of the week thanks to some stellar employment data.

Pound Sterling is wavering so far this week, with GBP/EUR fluctuating just above €1.18 and GBP/USD trading sideways at US$1.20.

Looking ahead, US inflation on Wednesday could affect market predictions for the pace of more Federal Reserve rate rises. On Friday, an expected contraction in the UK economy could hammer Sterling.

Pound dented by BoE recession warning

The pound initially strengthened last week as markets increasingly priced in a 50-bp rate rise from the Bank of England.

However, GBP exchange rates began to slip as the week went on. Political instability hurt Sterling, with the ongoing Tory leadership contest creating uncertainty. In addition, the UK’s final services PMI printed below initial estimates, revealing a larger-than-anticipated slowdown.

On Thursday, the BoE hiked rates by half a percent but also forecast a UK recession lasting from the end of 2022 through 2023. Sterling slumped but then bounced back, having seemingly entered oversold conditions.

The headwinds persisted into Friday. With GBP investors still mulling the BoE’s recession warning, Sterling slipped lower.

So far this week, the pound has wavered. Although European markets seem upbeat, the UK’s political and economic woes are weighing on GBP.

Investors will be anxiously awaiting the UK’s GDP data at the end of the week. Economists are forecasting a 0.2% contraction in the second quarter, which could see Sterling slump.

Until then, domestic political and economic news could drive most movement in the pound amid a lack of notable UK data.

Euro wavers amid mixed data

The euro wobbled last Monday amid some mixed eurozone data. German retail sales unexpectedly slumped, while the euro area manufacturing PMI confirmed a contraction in factory activity. However, the bloc’s unemployment rate held at a record low.

Concerns about the growing gas crisis in Europe weighed on the single currency throughout the week, dragging it lower on Tuesday.

More mixed data followed. While the eurozone’s final services PMI was revised higher, another surprise fall in retail sales pressured EUR.

The euro then rallied in the second half of the week. EUR seems to have enjoyed some cross-driven strength from the sell-off in GBP/EUR. Additionally, the European Central Bank’s (ECB) economic bulletin was far cheerier than the BoE’s outlook.

The single currency held these gains on Friday, despite its negative correlation to a soaring US dollar, thanks to strong German industrial production data.

Looking ahead to the coming week, EUR exchange rates could be mostly driven by any new developments in the European gas crisis, as Eurozone data is in short supply.

US dollar movement could also impact the euro, with the latest American inflation rate reading on Wednesday potentially causing some big shifts in USD.

US dollar soars as payrolls exceed forecasts

The US dollar slumped at the start of last week’s trade as a risk-on mood dampened demand for the safe-haven currency.

Risk sentiment shifted dramatically the following day, boosting USD, as China-US tensions escalated over an American delegation’s visit to Taiwan, which China views as a breakaway province.

Despite a return of risk appetite, the ‘greenback’ losses were tempered on Wednesday as the US services PMI and factory orders report unexpectedly improved.

This strong data added to expectations of more hawkish action from the Federal Reserve, with policymakers hinting at further rate hikes throughout the week.

Rate rise bets then saw USD jump higher on Friday following some positive jobs data. Non-farm payrolls printed at 528,000, more than double the expected figure, while the US unemployment rate unexpectedly fell to pre-pandemic levels.

The US dollar is somewhat subdued today amid a lack of US data and a fairly upbeat market mood.

The main focus for USD investors this week is Wednesday’s inflation data. Economics expect core and headline inflation to rise and fall, respectively. If inflation continues to rise, or seems to be becoming embedded, the ‘greenback’ could strengthen.

A forecast rise in US consumer sentiment on Friday may also boost USD.

Australian dollar rocked by RBA’s dovish rhetoric

The Australian dollar tumbled early last week after the Reserve Bank of Australia’s (RBA) dovish hike. Although the central bank raised rates by 50 bps, it hinted at a slower tightening cycle while trimming growth forecasts for the Australian economy.

The ‘Aussie’ manged to recover some losses as China’s services PMI and Australia’s balance of trade data both exceeded forecasts.

However, worries about Chinese military activity near Taiwan and renewed concerns of aggressive rate hikes from the Fed pulled AUD lower at the end of the week.

The Australian Dollar has strengthened so far this week as risk appetite returns to markets off the back of better-than-expected Chinese trade data.

AUD could enjoy a boost overnight on Monday as forecasters predict improvements in both business and consumer confidence.

Written by
Philip McHugh

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