US Dollar Should Be Doing Better

GBP looks vulnerable whilst below $1.2665

The Pound Sterling (GBP) is trading on the back foot against the US Dollar (USD), as the GBP/USD pair manages to hold above the $1.2600 level at the start of the week on Monday.

A negative shift in risk sentiment, despite easing Middle East geopolitical tensions, weighs on the higher-yielding Pound Sterling while the US Dollar struggles for traction amid the market’s nervousness ahead of Wednesday’s US Consumer Price Index (CPI) data.

In the UK, the focus will be on the monthly GDP data for February that will be released on Friday. The market expects a small uptick of 0.1% for February, which is down from the 0.2% increase in January, but if true it will add to the view that the UK’s flirtation with recession was only brief. If growth is weaker than expected, this could weigh on the Pound. The Pound is no longer the best performing currency in the G10 this year, that spot now goes to the US Dollar, which has gained as the market has priced out rate cuts from the Fed.

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EUR/USD trades with modest losses amid stronger USD

The EUR/USD pair struggles to capitalise on Friday's goodish rebound of around 50 pips from sub $1.0800 levels and meets with a fresh supply during the Asian session on Monday.

The upbeat Nonfarm Payrolls (NFP) report – showed that the economy added more than the anticipated, 303K jobs in March. This forced investors to scale back their bets for an eventual interest rate cut by the Federal Reserve (Fed) in June and the total number of rate cuts to two in 2024, which, in turn, is seen acting as a tailwind for the USD and exerting some pressure on the EUR/USD pair. In the meantime, rising bets for a June rate cut by the ECB, reaffirmed by softer Eurozone consumer inflation figures last week, might continue to weigh on the Euro and keep the EUR/USD bulls on the defensive.

The key event for Europe will be Thursday’s ECB meeting. The market doesn’t expect any change in interest rates at this meeting. A number of ECB speakers have recently said that it is too soon to start rate cuts as there is not enough information about the direction of wage growth.

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US inflation to test recent strength

The US inflation data, the Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Thursday, are likely to stand in a relatively quiet week ahead.

Despite the US Dollar subdued performance, the Greenback should not be written off just yet, as it may be able to restart its advance and regain momentum soon, especially if the March U.S. inflation report, due for release on Wednesday, beats projections and confirms Wall Street’s worst nightmare: progress on disinflation has hit a roadblock.

Consensus estimates suggest headline CPI climbed 0.3% on a seasonally adjusted basis last month, lifting the annual rate to 3.4% from 3.2% previously. The core gauge is also seen rising 0.3% month-on-month, but the 12-month reading is projected to have slowed to 3.7% from 3.8% in February, a positive but tiny step in the right direction.

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