GBP slipped against both the EUR and USD following the UK's unexpected uptick in unemployment, though its decline will likely be tempered by robust wage growth, fostering a cautious stance at the Bank of England (BoE).  GBP weakened as the Office for National Statistics revealed a rise in the UK's unemployment rate to 4.2% in February, surpassing market expectations of 4.0%.

Meanwhile, the significant average earnings metric, including bonuses, remained steady at 5.6% in February, exceeding market projections of 5.5%. Excluding bonuses, average earnings saw a slight dip to 6.0% from the previous month's 6.1%, yet still outpaced market forecasts of 5.8%.

Former BoE Monetary Policy Committee member Andrew Sentance suggests that UK regular pay growth continues to exceed levels "well above" the 3-4% range typically associated with 2% inflation.  Sentance notes, "Pay growth has only decreased by less than 2 percentage points from its peak of 7.9% last year. There is still a significant distance to cover before wage increases return to a sustainable pace."

The USD may receive another lift as US industrial production data is expected tonight.  After a 0.1% rise in February, headline industrial output is projected to climb by 0.4% month-on-month in March.  Core manufacturing likely expanded by 0.3% during the month, with an increase also anticipated in vehicle output.

Following a notable decline in February, it's anticipated that utilities will rebound. However, mining activity likely decreased throughout the month, primarily driven by a significant drop in coal production.  The USD has attained record highs amid diminishing expectations of Federal Reserve easing – this trend could persist, further bolstering the currency.

Global markets experienced significant declines on Friday amidst growing geopolitical tensions, particularly concerns regarding a potential Iranian strike on Israel over the weekend.  However, market anxiety eased on Monday following Iran's weekend assault, largely thwarted by Israeli air defences, viewed as a retaliatory measure for an earlier suspected Israeli strike on Syria.  Iran labelled the attack a "success," leading observers to speculate that direct hostilities between Israel and Iran could temporarily subside.

Nevertheless, global markets still face substantial challenges in the upcoming week.  The previous week's higher-than-anticipated US inflation figures prompted a reassessment of expectations for US interest rate cuts, driving the USD to nearly six-month highs.  Conversely, a decrease in European inflation has prompted the European Central Bank to consider rate cuts, possibly as early as June, resulting in a sharp decline in the EUR's value last week.

Looking forward to this week.  The release of US retail sales data will provide insight into the strength of the US economy.  Additionally, the industrial production and Philadelphia Federal Reserve index releases will be closely monitored for further indications of US economic performance.

Data on employment and retail sales from the UK, Germany's ZEW survey, and Australia's employment figures will offer insights into the global economy's health, with investors keenly analysing these releases for signs of economic momentum or potential challenges.

The data focus of the week's foreign exchange markets will be Wednesday's crucial inflation releases from the UK.  A deviation from expectations could significantly impact the value of GBP, with any shortfall compared to consensus forecasts likely exerting downward pressure.

Conversely, an inflation reading exceeding consensus (where consensus stands at 2.9% year-on-year) would likely bolster GBP, potentially altering expectations for the timing of the first interest rate cut from June to August, positioning the Bank of England differently from the ECB regarding the initiation of rate cuts.

As expected, the European Central Bank (ECB) maintained its key policy rates at record highs in yesterday's rate decision.  However, it delivered its most unequivocal indication yet of its readiness to initiate rate cuts in the near future. Consequently, the euro depreciated to $1.07, marking its lowest point in approximately two months.  Meanwhile, the yield on the 10-year German Bund remained steady at 2.45%, maintaining its proximity to its highest level in over four months, bolstered by developments in the US Treasury market.

The USD continued its upward trajectory against various currencies over the last 24 hours, fuelled by worries over ongoing inflationary pressures in the US, exacerbated by a rise in producer prices.  This surge propelled the dollar index to reach a new six-month peak, mirroring the ascent of US Treasury yields.  Speculation about Federal Reserve rate cuts has dwindled, while global risk sentiment has been shaken, reflected in US stock indices facing their first two-week downturn since October 2023.

Despite the UK economy slipping into a technical recession at the close of last year, investors have found encouragement in recent positive business surveys, suggesting the downturn may be brief.  Indeed, UK GDP for February posted a 0.1% month-on-month increase, aligning with market expectations but at a slower pace compared to the previous month.  The primary boost came from production, which surged by 1.1%, rebounding from a 0.3% decline in January. Conversely, construction contracted by 1.9%, following a 1.1% expansion.  Looking at the three-month period ending in February, British GDP expanded by 0.2%.

GBP has maintained a relatively positive stance compared to its counterparts, showing a 1.4% increase against the EUR since the beginning of the year.  This can be attributed in part to the anticipation that the ECB will implement more rate cuts than the Bank of England.  However, the currency pair has exhibited minimal volatility and momentum in either direction, remaining confined within a narrow 1.2% range over the past three months . Policy and growth differentials continue to be crucial factors, and we are closely monitoring the data for any insights.

US stocks plunged, bond yields soared, and the USD surged to its highest point since November following a third consecutive month of unexpectedly high inflation in the US.  In March, headline inflation reached 3.5% annually, surpassing the forecast of 3.4%, while the core reading came in at 3.8%, compared to an expected 3.7%.  As a result of this news, market sentiment swiftly abandoned hopes for a rate cut in June. Prior to the CPI announcement, the likelihood of a cut was estimated at around 60%, but it plummeted to just over 20% afterward.

The USD/JPY pair surged by 0.9% in Asia, marking fresh 34-year highs and highlighting the strength of the USSD in the region.  This puts the spotlight on 155.75, though attaining it may be challenging, especially in the short run.  The Bank of Japan has shifted away from nearly a decade of unconventional loose policies but continues to maintain an accommodative stance.  Despite this, the struggling Yen has seen little improvement, particularly as the Federal Reserve appears hesitant to loosen its monetary restraints.  However, with the BoJ raising rates last month and potentially planning another hike within the year, while the Fed is anticipated to decrease rates, the contrast in monetary policies between the two central banks remains significant.

The European Central Bank (ECB) takes centre stage today following the decisions of two significant central banks to maintain their rates over the past 24 hours.  Yesterday, the Reserve Bank of New Zealand kept its rates unchanged at 5.50% and showed no inclination toward considering rate cuts in the near future. Initially, the NZD strengthened after the announcement but later aligned with most markets following the US CPI figures.  Also, the Bank of Canada similarly opted to hold rates steady at 5.00% and indicated a need for further evidence before considering rate cuts.

Today's ECB decision holds particular importance, as markets currently view the ECB as the major central bank most likely to implement substantial rate cuts over the next 12 months.  Any confirmation tonight that the ECB is contemplating rate cuts could prompt a rapid decline in the value of the EUR.