US dollar surges amid deferred Fed rate cut bets

The US dollar extended its recent winning streak on Friday as markets continued to dial back their expectations for Federal Reserve interest rate cuts.

So far this morning the pound is mixed, with GBP/EUR holding at €1.1697 and GBP/USD climbing to $1.2469. GBP/CAD and GBP/AUD are subdued at CA$1.7143 and AU$1.9239, respectively, while GBP/NZD is edging higher to NZ$2.1002. 

Looking ahead, will falling American retail sales curb the US dollar’s recent success?

What’s been happening?  

Friday saw the safe-haven US dollar reach a fresh five-month high amid risk-averse trade, as Wednesday’s hotter-than-forecast CPI print continued to drive USD’s upside.

Speculation that the Federal Reserve will be amongst the last of the major central banks to lower interest rates served to preserve USD’s recent gains. 

Meanwhile, diverging Fed and European Central Bank (ECB) monetary policy outlooks exacerbated the euro’s downside, with the common currency tumbling to a five-month low.

In turn, USD strengthened further as markets surmised that the Fed would not match the ECB’s dovish tilt anytime soon.

Elsewhere, the UK’s lacklustre GDP report left Sterling mostly subdued against its major rivals. While economists were optimistic that the UK economy had turned a corner, the meagre 0.1% growth in February indicated ongoing fragility across the British economy.

Markets were largely unmoved by the British release, leaving GBP quiet as the session closed.

What’s coming up?  

Turning to today’s session, a forecast slump in American retail activity could dent the ‘greenback’. Retail sales are forecast to have declined to 0.3% in March, down from the previous month’s 0.6%. Signs that consumer spending continues to decelerate in the US could weigh on USD this afternoon.

Looking to the Eurozone, a speech from ECB Chief Economist Philip Lane may serve as the core catalyst of EUR movement. Amid soaring ECB rate cut bets, further suggestion of accommodative monetary policy in the coming months could solidify market expectations of a June rate cut.

A data-light start to the week for the pound could leave GBP vulnerable to market risk dynamics, with cheery trade boosting the increasingly risk-sensitive currency.

Additionally, commentary later today from Bank of England (BoE) policymaker Sarah Breeden could imbue GBP exchange rates with additional volatility.