Foreign Exchange Report

The GBP/USD exchange rate has been a rollercoaster ride this past week! Cautious hikes from both the Bank of England and Federal Reserve prevented clear gains, leading to fluctuations in the exchange rate. While the GBP began the week on a positive note, a lack of clear forward guidance from the BoE left investors hesitant. A rebound in the UK’s retail sales and growth in the service sector kept the GBP trading strongly to close the week.

Meanwhile, the USD traded weakly at the start of the week but managed to recover modestly ahead of the Federal Reserve’s interest rate decision. The Fed delivered the expected rate hike but highlighted the need for caution, leading to pared-back expectations of further rate hikes and weakening the USD against most of its peers.

Looking ahead to next week, the data calendar is relatively thin for the GBP, but signs of a weakening retail sector could weigh on the currency. For the USD, the week is more packed with the latest CB consumer confidence index, final GDP readings, and core PCE data due to release. A tricky situation for the Fed, with recent banking turbulence and a rapidly diminishing room to hike rates further.

The Euro-Dollar could rise above 1.08 as concerns about the stability of the banking sector dissipate and the ECB interest rate outlook comes back into focus. However, opinions about the outlook for the single currency differ markedly, and much about how the Euro-Dollar pair fares this week is likely to be determined by European and U.S. inflation figures due out on Friday. Any upside surprise in European inflation would potentially lead markets to bank on further increases in ECB interest rates. The consensus among economists sees Eurozone inflation as likely to fall from 8.5% to 7.5% for the month of March on Friday, but also looks for the more important core inflation rate to rise from 5.6% to 5.7%.