Markets have been particularly volatile over the past week, with the FX space dominated by a clear tug-of-war between a softer US Dollar, shifting risk sentiment and regional political developments.
The Dollar started the week on the back foot as investors leaned into the idea of a potential “soft landing” for the US economy following cooler inflation data, with CPI printing around 2.4%. That initially weakened the greenback, but the move didn’t last. A sharp tech-led sell-off in equities mid-week triggered classic risk-off positioning, which brought safe-haven demand back into the Dollar and helped it recover some lost ground.
Sterling has been more fragile. Against the Euro, the Pound slipped toward the 1.15 area as investors began to price in a political risk premium, with continued speculation around leadership stability in the UK. However, against the Dollar, GBP held up relatively well, trading around the mid-1.36s thanks to the broader USD softness earlier in the week.
Elsewhere, the Japanese Yen staged a notable recovery, moving back toward the 153 level. Much of that move appears to be driven by the unwinding of carry trades, alongside renewed confidence following a decisive election result in Japan. Markets are beginning to factor in the possibility of a more disciplined fiscal approach and, further down the line, eventual Bank of Japan policy normalisation.
Looking ahead, the coming week has the potential to be another volatile one, although it starts quietly. Monday is subdued due to Presidents’ Day in the US, meaning thinner liquidity and fewer drivers.
Things pick up on Tuesday with UK labour market data. Unemployment is expected to remain around 5.1%, while average weekly earnings are forecast to ease slightly to 4.6%. Any surprise in either direction could move Sterling, especially given how sensitive the Pound currently is to domestic data. We also have Germany’s ZEW sentiment survey, expected to improve from 59.6 to around 65.0, which would point to rising confidence in the Eurozone’s largest economy. Later in the day, US manufacturing figures and Canadian inflation are due, with weaker US manufacturing potentially weighing on the Dollar if confirmed.
Wednesday begins with the RBNZ interest rate decision, where no change is expected. The focus then quickly shifts to UK inflation data. Core CPI is forecast to fall toward 3%, with services inflation also expected to ease. Softer inflation supports the narrative that earlier rate hikes are doing their job, although it also keeps the door open for future cuts, which can be a mixed signal for Sterling. In the evening, the FOMC minutes will be closely watched for clues around the timing of the next US rate cut.
Thursday is lighter but still relevant, with Eurozone consumer confidence and US jobless claims. A continued drop in jobless claims would reinforce the idea that the US labour market remains resilient.
We finish the week on Friday with UK retail sales, expected to come in slightly weaker at around 0.2%. That could add pressure on the Pound if confirmed. Flash PMI data from both the UK and Europe will also give a fresh snapshot of economic momentum, with early expectations pointing to softer readings, particularly in the UK. Finally, US GDP data is due, with growth expected to slow toward 2%. A weaker reading here could take some momentum out of the Dollar heading into the weekend.
All in all, it feels like another week where data, politics and sentiment will continue to pull markets in different directions. With Sterling already looking sensitive and the Dollar still reacting to every shift in risk appetite, we should expect movement rather than stability.
GBP/EUR 1.1493 GBP/USD 1.3640 GBP/AED 5.0125
GBP/AUD 1.9256 GBP/CHF 1.0486 GBP/CAD 1.8575
GBP/NZD 2.2588 EUR/USD 1.1854 GBP/ZAR 21.7545