GBP initially gained support from last Tuesday's unemployment figures, which showed a lower rate of 3.8% in January compared to the forecasted 4.0%, coupled with stronger-than-expected wage growth at 5.8% versus the anticipated 5.6%. However, on Wednesday, GBP faced pressure as a weaker inflation result was reported, and Thursday confirmed that the UK had entered a recession. GBP experienced a boost on Friday when data revealed that UK retail sales had surged at their fastest pace in almost three years in January.
Despite the recent setbacks, expectations regarding the Bank of England's (BoE) monetary policy outlook remain more hawkish compared to other major central banks. The likelihood of BoE interest rate cuts has reduced, with less than three 25 basis points of cuts projected for 2024. This has helped limit the weakness of GBP, allowing GBP/EUR to regain the €1.17 level, although it had fallen sharply from its recent 18-month highs and suffered a third consecutive weekly decline. GBP/USD also declined for a third straight week but found support at its 50-week moving average and is now back above the $1.26 mark at the beginning of the week.
While fundamental risks persist due to growth differentials favouring the still-high-yielding USD, there is agreement in the market that the BoE is likely to maintain higher interest rates than the Federal Reserve (Fed) and the European Central Bank (ECB) for an extended period. This expectation supports GBP over the long term, given the preference for yield differentials.
The key domestic risk event for GBP traders this week will occur on Thursday when flash PMIs for February are released. Positive readings, building on the improvements seen in January for both manufacturing and services sectors, are expected to further bolster demand for GBP. GBP currently remains well supported, and there is no apparent reason for this trend to change over the next few weeks.
EUR maintains a lateral trading pattern against the USD, staying above the $1.07 level, situated squarely within its six-month trading range. Despite the reduction in cumulative rate cut expectations for ECB easing by the year-end, any potential upward movement for the EUR/USD seems constrained, with a heavy resistance at $1.0850.
