Weekly market analysis: Pound slips as economic worries mount, US dollar soars amid renewed Fed rate rise bets

After initially rising, the pound stumbled last week as the UK’s economic and political woes continue to pile up.

The US dollar, meanwhile, surged higher as markets began pricing in another 75-bp interest rate rise from the Federal Reserve.

So far this week, Sterling is struggling for a clear direction. GBP/EUR has edged up to €1.18 while GBP/USD has wavered lower to US$1.18.

Looking ahead, the flash PMIs are the focus for European investors. Across the Atlantic, the Federal Reserve’s Jackson Hole Symposium could cause some big movement. Fed Chair Jerome Powell’s speech is in the spotlight.

Pound undermined by economic woes

The pound found some success early last week as markets began pricing in another half-point rate hike from the Bank of England (BoE) at its next interest rate decision following a Reuters poll of economists.

The latest UK labour market overview added to these expectations, with strong employment and above-forecast wage growth prompting further rate rise bets.

However, ongoing fears about the trajectory of the UK economy eventually pushed Sterling lower. Wednesday’s inflation reading exceeded forecasts, hitting 10.1%. Although wage growth is higher than usual, it remains far below inflation, leading to a record fall in real pay.

The income crunch has prompted industrial action across the UK, including fresh rail strikes last week.

Despite an unexpected rise in UK retail sales on Friday, the worrying outlook for the UK – with a recession looming, a political leadership vacuum and growing discontent among workers – dragged the pound lower.

Strike action has continued this week, with workers at Felixstowe – the UK’s biggest container port – downing tools and British lawyers voting to strike indefinitely from 5 September.

Looking ahead, the latest flash PMIs on Tuesday could impact the pound. These surveys give a snapshot of the UK’s services and manufacturing sectors, so GBP investors will take their cues from the apparent health of the UK economy.

Other than this, a scarcity of data could see Sterling trade on domestic news. Further strikes and political uncertainty may weigh on GBP.

Euro hurt by surging gas prices

The euro was muted at the start of last week’s trade as concerns over falling water levels in the Rhine – a key trade artery for Europe – added to EUR investors’ many worries.

Germany’s ZEW economic sentiment index then unexpectedly slipped to a near 14-year low, putting more pressure on the single currency. But a pullback in the US dollar helped the euro recoup some losses due to the currencies’ negative correlation.

Positive employment change and GDP growth rate data helped the euro mid-week. Although these reports came in slightly below estimates, they still presented a positive overall picture of the eurozone economy in the second quarter of 2022.

This respite was short-lived, however. A fresh surge in gas prices added to anxiety around the eurozone’s energy crisis, with high costs and shortages threatening to trigger a recession later in the year.

Turning to the week ahead, the eurozone’s flash PMIs may create headwinds for the euro. Economists expect them to show that the bloc’s manufacturing sector remains in contraction and the services sector slowed to near stagnation.

The latest meeting accounts from the European Central Bank (ECB) may provide EUR with some support later in the week, if ECB officials show an appetite for more steep rate rises. However, economic concerns could severely cap gains.

US dollar soars on Fed rate rise bets

The safe-haven US dollar caught some bids early last week as worries about China’s slowing economic recovery triggered widespread risk aversion. However, the market mood improved somewhat as the week went on, causing the ‘greenback’ to retreat.

Sentiment shifted again on Wednesday, lifting USD. In addition, stronger American retail sales volumes added to the US dollar’s upside.

The Federal Open Market Committee (FOMC) meeting minutes caused little movement in the ‘greenback’, as they revealed nothing new to markets. However, subsequent comments from Federal Reserve officials then saw the US dollar surge higher.

One policymaker said that they don’t believe the US economy is in a recession, considering recent strong data, and two Fed officials hinted at another jumbo 75-bp rate rise at the US central bank’s next meeting. USD hit fresh multi-month highs against some of its rivals.

The American currency held its ground at the start of this week’s trade amid a sour market mood and ahead of the Fed’s Jackson Hole Symposium. Fed Chair Jerome Powell could use the opportunity to address market expectations about further rate rises and provide more clarity.

Just before Powell’s speech, we have the latest US core PCE price index – the Fed’s preferred measure of inflation. If it confirms that price pressures are easing in America, USD may slip.

Australian dollar falls as market mood sours

The Australian dollar initially firmed last week after the Reserve Bank of Australia’s (RBA) latest meeting minutes hinted at further rate rises.

However, a souring market mood and a pullback in the commodities market weighed on the risk- and resource-linked ‘Aussie’ as the week went on.

Downbeat jobs data also hurt AUD, as employment and participation both unexpectedly fell.

The Australian dollar managed to regain some ground at the start of this week, thanks to its status as a proxy for the Chinese economy, as the People’s Bank of China (PBoC) cut its loan prime rates.

Aside from risk appetite, the flash PMIs for August could cause some movement. If the Australian economy shows signs of weakening, AUD could fall.