GBP's strength against the EUR has waned from its peak in 2024, but analysts at Barclays and Julius Baer remain steadfast in their forecasts of a resurgence in GBP to new heights.  The GBP/EUR pair has dipped from levels just above 1.17 to around 1.1650 after two consecutive weeks of decline, driven partly by a softer-than-expected UK inflation release and the outcome of the March Bank of England policy meeting.

The likelihood of a June interest rate cut by the Bank of England increased as Mann and Haskel withdrew their support for further rate hikes, with the Bank indicating it could reduce rates without risking inflationary pressures.  If expectations for a rate cut in June diminish in response to incoming data, the Pound could regain ground lost after the Bank of England meeting.

Our primary scenario still anticipates GBP strengthening against the USD throughout 2024, approaching the $1.30 mark. However, if UK economic momentum slows alongside a sharper decline in UK inflation, the likelihood of a May rate cut by the Bank of England (BoE) could rise.  Under such circumstances, GBP could face downward pressure, potentially revisiting the lower $1.20 range.  The main risk to our primary scenario arises if there is a resurgence in US economic momentum, coupled with persistent inflation, prompting the Federal Reserve to maintain higher rates for longer than expected. We are eagerly awaiting the latest US PCE price index report this Friday for further insights into the trajectory of Fed policy.  A significant positive surprise could cast doubt on the June rate cut currently factored in by markets, potentially pushing the dollar towards fresh six-week highs against a basket of currencies.

EUR/USD is poised to register a 2% loss in Q1 2024 – its poorest year-to-date performance since 2021.  The pair has remained within the broader range of $1.0500 to $1.1100 for nearly 14 months, and unless unexpected US data emerges, significant movements are improbable. Notable events today include German unemployment figures and the Eurozone's lending reports, though these are likely to be overshadowed by the US final GDP print scheduled for later today.  Meanwhile, Friday’s US PCE report poses a risk if the outcome significantly deviates from expectations, especially considering that most markets will be closed for the Easter break.  Among other EUR pairs, EUR/SEK has climbed to a fresh four-month high following hints from Sweden’s Riksbank suggesting a possible cut in borrowing costs in May or June if inflation prospects remain favorable. Furthermore, EUR/CHF is trading at its highest level in almost eight months and is set for its eighth consecutive weekly gain, marking its longest winning streak since 2003, following last week's surprise rate cut by the Swiss National Bank.

Despite facing significant resistance due to excessively optimistic GBP positioning, GBP is poised to benefit from favourable seasonal patterns.  April has historically been the strongest month for the GBP against the USD, with GBP/USD typically experiencing an average increase of 1.2% over the past two decades.  One explanation for this recurring trend is the surge in capital inflows into the UK driven by dividend payments to British shareholders from foreign companies and other investment inflows marking the commencement of the UK financial year.

Despite being largely overlooked by the markets, the latest GfK survey revealed a third consecutive month of improvement in German consumer sentiment, albeit from a subdued base. This marks the highest reading since the beginning of the year, reflecting slight upticks in income expectations and economic outlook. However, the willingness to make purchases remained largely unchanged, persisting at near two-year lows. The gradual and sluggish recovery of consumer sentiment suggests that a sustained rebound in the German economy will be a prolonged process. The IMF projects Germany's growth to reach only 0.5% in 2024, nearly half the pace of the Eurozone bloc.

EUR/USD struggled to breach the resistance level of the 200-day simple moving average at $1.0836, remaining within a short-term downtrend channel. In the immediate future, any further decline is expected to find support around the March lows of $1.0800. Investors are awaiting Eurozone economic sentiment and consumer inflation expectations reports later today, though neither is anticipated to significantly impact the market given the overnight option premium remains below its long-term average. Current indications suggest no significant increase in FX volatility, with EUR/USD 1-month realized volatility maintaining near 26-month lows.

USD/JPY has surged by more than 7% in the current quarter, establishing the yen as the weakest performer among major currencies thus far in the year. Despite the Bank of Japan's first interest rate hike since 2007, market sentiment suggests that the next rate increase may be postponed, leaving intervention by Japanese authorities as the primary means to curb the yen's decline.  Japan's finance minister has issued his most forceful warning yet regarding yen depreciation as USD/JPY approaches levels that prompted official foreign exchange intervention over a year ago, resulting in a 4% rally in the yen against its major counterparts in a single day.

In March, the Confederation of British Industry (CBI) reported a slight increase in its monthly retail sales balance.  The indicator for yearly sales showed improvement, rising to +2 from the previous -7, marking an end to a 10-month streak of declines.  This stabilization in retail sales offers a glimmer of hope that the sector's downturn may be reaching its lowest point.  This news comes after recent official data revealed that British retail sales remained steady in February, defying expectations of a decline.  With the current pace of disinflation, reflected in a 1.5% 6-month annualized inflation rate, prospects for a consumer-led recovery in UK GDP growth are improving.

The recent dovish stance taken by the Bank of England (BoE) has bolstered expectations of interest rate cuts starting from June, potentially boosting consumer confidence and spending.  Money markets are even factoring in a possibility of a rate cut in May, contributing to the pound's weakness last week as UK gilt yields reached multi-month lows. Today, there are no significant UK data releases, so market sentiment and the strength of the USD are likely to influence the direction of GBP.

Another significant factor weighing on the GBP's strength is its positioning, with the currency being the most overbought among G10 currencies.  The 10-year median of net GBP long positions stands at -9.5% of open interest, but currently, these positions are around 23%. Although recent CFTC data indicated a reduction in net GBP long positions from a 17-year high to 53,200 contracts, down from 70,451, there remains a possibility of further unwinding of these long positions in the coming weeks.  While a surprise rate cut in May could act as a catalyst, it's not the base case scenario; however, it could potentially drive GBP/USD towards $1.20.

European equity markets kicked off the shorter week with a modestly upbeat tone, continuing a nine-week winning streak. The EUR found support around the $1.0800 mark against the USD, buoyed by a general weakening of the dollar and profit-taking activities ahead of month-end.  This occurred despite dovish remarks from a usually hawkish ECB policymaker, which stirred optimism that the central bank of the eurozone might initiate rate cuts in the near future.

Despite yesterday's rebound, the euro remains vulnerable to further weakness in the short term. Although the latest Gfk print for April showed a third consecutive rebound, it fell short of market expectations, dampening the ascent of EUR/USD.  Attention now turns to the US durable goods report later today.  If there's an upward rebound from last month's print, which marked the most significant monthly decline since April 2020, it could drive EUR/USD below the $1.0800 barrier, testing a 5-week low.

Furthermore, the surprise rate cut by the Swiss National Bank (SNB) last Thursday has raised speculation that the European Central Bank (ECB) will soon follow suit.  Given the history of the two central banks mirroring each other, albeit typically with the SNB following the ECB, the markets are anticipating further policy easing in the second quarter.  This anticipation is likely to keep a lid on EUR/USD upside potential, and the euro may struggle to advance against the USD without a fresh catalyst.

The Bank of England opted to maintain rates at their 16-year peak of 5.25%, despite a decline in headline inflation from 4% to 3.4%, marking its lowest level since 2021. Analysts anticipate inflation will ease towards its 2% target in the forthcoming months, yet Bank officials remain keenly attentive to wage growth. The Bank's decision was split among its members, reflecting a lingering caution against premature rate cuts.

Market forecasts suggest the initial rate reduction may materialise in August, though June remains a viable option, with a collective 0.70% reduction anticipated for the year.

In parallel, the US Federal Reserve upheld its current policy stance, with Chair Powell emphasising the necessity for sustainable inflation alignment with targets. The Fed continues to anticipate three rate decreases throughout the year.

Meanwhile, the European Central Bank signals a hold on rates until June, awaiting substantial evidence to initiate an aggressive rate reduction cycle, with approximately 1% of cuts factored in amid a dim economic outlook, particularly evident in Germany's lagging performance.

Currency markets exhibit volatility within recent ranges, devoid of clear conviction or trend. GBP/USD hovers around 1.2600, descending from its recent yearly high near 1.2900, while GBP/EUR remains positioned towards the upper boundary of its established range of 1.1500 – 1.1750.

Focus shifts to forthcoming UK growth data, accompanied by quarter-end dynamics influencing market momentum.