Sterling remains vulnerable to risk appetite: A look at the week ahead

The Pound Euro exchange rate experienced a strong uptrend last week, although the Pound faced challenges on Tuesday due to gloomy economic forecasts. While the Pound fluctuated inconsistently against the US Dollar as the Pound remained vunerbale to risk appetites. Consequently, the Euro weakened against other currencies following disappointing data releases.

The Pound attempted to recover last week after facing sustained challenges the week before. The Bank of England (BoE)'s decision not to raise interest rates in its September monetary policy meeting led to a sharp decline in the currency. However, the Confederation of British Industry (CBI)'s monthly retail sales data provided some support for GBP on Monday, indicating a slowdown in the inflation-driven decline in UK spending. Despite this, concerns about a possible recession kept investor confidence low.

In the latter part of the week, increased risk appetite benefited the Pound against safe-haven currencies. GBP traders appeared to adapt to higher interest rates in the UK, with analysts at UOB Group noting a strong rebound in GBP. Towards the end of the week, the release of the UK's finalized GDP report confirmed economic expansion in the second quarter of 2023. This growth prospect eased concerns among bearish investors, offering a glimmer of hope amid the overall uncertain economic and political landscape.

Looking ahead, the Pound Euro exchange rate is expected to face a volatile week, with various Eurozone data and significant US economic releases posing potential challenges. The Euro's strength is often influenced by US Dollar (USD) movements, and any concerns about the 'Greenback' tend to bolster the Euro due to their strong negative correlation.

Positive developments from the Eurozone are likely to be limited, as German data poses a risk of disappointing investors. Although Germany's trade surplus is predicted to remain stable and factory orders are expected to rise, recent data from the Eurozone's largest economy has fallen short of expectations, creating obstacles for the Euro.

As for significant UK data, there is a scarcity, making GBP/EUR and GBP/USD more susceptible to external factors such as global risk appetite. If market sentiment remains optimistic, the Pound may receive a boost against other currencies.

EUR

The Euro faced challenges at the start of the week, with European Central Bank (ECB) President Christine Lagarde's prediction of continued economic weakness in Q3 contributing to selling pressure. Lagarde mentioned that she anticipated inflation in the bloc to remain 'too high for too long' and clarified that the ECB was not currently considering rate cuts.

Despite these headwinds, the Euro received some support as Germany's Ifo business climate indicator surpassed expectations, reaching 85.7. This allowed the Euro to maintain modest gains against the Pound on Tuesday. However, midweek, Germany's GfK consumer climate indicator reported its lowest reading since April, adding to the Euro's challenges.

Although Eurozone economic sentiment exceeded forecasts on Thursday, the Euro struggled to recover its losses due to Germany's headline inflation reading for September, which stood at 4.5%. This was 1.6% lower than August's figure and 0.1% below predictions, indicating that a hawkish policy stance from the ECB might not be necessary.

On Friday, the situation worsened for the Euro as German retail sales fell instead of strengthening as anticipated, deepening the challenges for the Euro. Moreover, the German economy added fewer jobs than expected, and in the week's major release, Eurozone inflation fell short of forecasts, further impacting the Euro's performance.

USD

At the beginning of the week, the US Dollar (USD) surged to its highest levels in ten months against certain currencies, benefitting from a bearish market sentiment that favored safe-haven assets.

Concerns were mounting due to elevated global borrowing costs, coupled with anxieties about a potential US government shutdown, which contributed to the overall negative market sentiment.

On Tuesday, the US Dollar retreated slightly from these peaks, despite the prevailing risk-off sentiment among investors. Many were likely looking to capitalize on the Dollar's strength, taking profits from their investments.

The grim market atmosphere persisted throughout Wednesday. On this day, the US Dollar gained further strength due to better-than-expected durable goods data, adding to its momentum.

However, by Thursday, the US Dollar started to decline against other currencies as the market sentiment began to improve. Additionally, investors were looking forward to Friday's release of core PCE data, a key inflation indicator.

The core inflation reading, which serves as the Federal Reserve's preferred gauge, matched forecasts and cooled down, leading to a weakening of the US Dollar as a result.

‍

Data for the week ahead

Monday

14.00 USD ISM Manufacturing PMI

15.00 USD Fed's Chair Powell Speech

‍

Tuesday

03.30 AUD RBA Interest Rate Decision

03.30 AUD RBA Rate Statement

06.30 CHF Consumer Price Index

‍

Wednesday

01.00 NZD Monetary Policy Statement

01.00 NZD RBNZ Interest Rate Decision

01.00 NZD RBNZ Rate Statement

09.00 EUR Retail Sales

14.00 USD ISM Services PMI

16.00 EUR ECB's President Lagarde Speech

‍

Thursday

00.30 AUD Trade Balance

‍

Friday

12.30 USD Average Hourly Earnings

12.30 USD Nonfarm payrolls

12.30 CAD Net Change in Employment

12.30 CAD Unemployment Rate

‍