British Pound Under Pressure Amid Economic Data and Market Sentiment
The British pound remains under pressure this week, hitting its lowest level in nearly a month against the US dollar on Monday. GBP/USD dipped below $1.31, while GBP/EUR fell closer to €1.19, despite rising UK bond yields. The cautious market sentiment during the Asian session, fuelled by a lack of Chinese stimulus announcements, added to the pound’s struggles as it is a risk-sensitive currency.
Data released yesterday revealed that UK salaries increased at the slowest rate in three-and-a-half years in September, signalling a softening labour market. The rising number of job candidates and decreasing demand for staff contributed to wage growth for permanent hires slowing to its weakest since February 2021. This bolsters expectations of more aggressive rate cuts from the Bank of England (BoE). However, despite the soft labour data, UK gilt yields surged to multi-month highs following the strong US jobs report, lending some support to the pound.
Additionally, today's data shows UK retail sales rose by 1.7% on a like-for-like basis in September compared to the same period last year, marking the fastest growth in six months, driven by higher spending on clothing as the holiday shopping season kicks off.
Despite the recent dip, the pound remains the best-performing currency year-to-date, up over 3% against the dollar. With speculative traders still net bullish on the pound, this could prompt profit-taking as year-end approaches, especially with upcoming uncertainties surrounding the UK Budget and the US presidential election.
Euro Struggles Below $1.10 as Economic Weakness and Rising Oil Prices Weigh
The euro remains under pressure, trading below $1.10 this morning, with European equities set to open lower. Chinese markets have also lost momentum since Friday, underperforming global peers. Oil prices have surged, with Brent crude climbing above $80 per barrel for the first time in six weeks, driven by geopolitical tensions between Iran and Israel, impacting pro-cyclical currencies.
The euro's main challenge comes from the reduced expectations of Federal Reserve rate cuts this year, coupled with continued weakness in the German economy. German factory orders dropped 5.8% in August, marking the steepest decline since January 2024. Inflation across major Eurozone economies has also fallen below 2%, increasing the likelihood of a 25 basis point interest rate cut by the European Central Bank (ECB) next week.
Although ECB policymakers have signalled the market to prepare for this rate cut, rising US Treasury yields, driven by strong economic data, have kept German Bund yields from falling. This alignment of monetary policies between the ECB and the Fed has weighed on the EUR/USD exchange rate, which fell from $1.12 to below $1.10 last week.
