The euro showed a relatively stable performance against the US dollar, with the Greenback gaining strength amid a cautious market sentiment driven by mixed macroeconomic data releases from the US. In the early session, EUR/USD experienced gains due to a better-than-expected GfK print. However, it was unable to sustain these early gains and ultimately closed the day with minimal changes.

The GfK Consumer Climate Indicator revealed a slight improvement in German consumer morale for March compared to the 11-month low in February. Despite this, the headline index remained below its long-term average for the 28th consecutive time, marking the longest pessimistic streak. Income expectations reached their highest level since February 2022, while the propensity to buy and economic prospects remained relatively stable. Concurrently, the propensity to save reached its highest point since June 2008. This trend was mirrored across the Eurozone, where data indicated a notable slowdown in bank lending growth to nearly a 9-year low. This highlighted the significant deceleration in the bloc's economy due to the European Central Bank's unprecedented tightening measures implemented in recent months. Overall private sector credit growth, encompassing both households and non-financial corporations, remained at 0.4%, unchanged from the previous month.

EUR/HUF saw an increase of over 0.6%, reaching a 5-month high, as the National Bank of Hungary (NBH) executed an anticipated 100 basis points cut to its base rate, bringing it down to 9%. This move accelerated the rate-cutting pace following weaker-than-expected growth and benign inflation data since the January meeting. The euro maintained stability across most G10 pairs, with slight appreciation observed only against the Canadian dollar and the Swedish Krona. Looking ahead, investors will closely monitor today's Eurozone sentiment data for additional signs of a potential recovery in the Eurozone.

In spite of the general weakness observed in the US dollar, GBP/USD is encountering challenges in maintaining levels above $1.27, largely due to investors scaling back their optimistic positions on the pound after eight consecutive weeks. The 3-month implied volatility for GBP/USD has reached a four-year low, indicative of investor complacency and the currency's consistent performance.

The subdued atmosphere in the foreign exchange market has heightened the popularity of carry trades, benefiting the pound as a higher-yielding currency. This trend has been supported by the hawkish reassessment of UK interest rate expectations. While the assumption that the Bank of England (BoE) will delay interest rate cuts compared to the Federal Reserve and the European Central Bank (ECB) has favored the pound in recent months, the sustainability of this advantage is uncertain. Money markets are currently pricing in fewer than three rate cuts by the BoE before the year-end, a significant reduction from initial expectations at the beginning of the year.

On the economic front, we believe that the UK has already exited its technical recession, and the potential for a faster decline in inflation increases the likelihood of a consumer-driven recovery in UK GDP growth in 2024.

Although this week's UK data docket is relatively quiet, the Confederation of British Industry's monthly retail sales balance, a measure of sales compared to a year ago, showed improvement, rising to -7 in February from -50 in January—the slowest decline in 10 months. Despite this, the pound is experiencing a decline across various currency pairs, with GBP/EUR slipping back below the €1.17 threshold.

Yesterday's stronger-than-expected UK PMIs indicate that the technical recession in the UK may already be over. Private sector output in the UK expanded for the fourth consecutive month, reaching its fastest pace since May 2023. The robust performance is driven by a strong service sector (PMI of 54.3), outperforming the Eurozone (PMI of 50). Although GBP/EUR remains below the €1.17 mark, GBP/USD is holding above $1.26, rebounding from a three-week high above $1.27, marking a potentially strong week for the currency pair in 2024.

UK policymakers are maintaining a cautious dovish stance, reinforcing market anticipation of an easing cycle starting in August. Approximately 0.75% in cuts are projected for this year. The committee is particularly cautious about early cuts, emphasizing that while headline inflation is expected to ease towards the target, wage inflation remains excessively high. Officials downplayed the significance of the technical recession, highlighting that the inflation outlook holds more importance for monetary policy than growth. The committee is mindful that the full impact of rate increases has not yet fully permeated the underlying economy.

Simultaneously, the budget on March 6th will shift the spotlight to fiscal policy and its implications for the growth outlook.

In the US, inflation remains the primary driver of monetary policy, and a further moderation is anticipated in the upcoming months, with rate cuts expected to commence in June. The robust performance of the US economy will dictate the extent of rate cuts, with market forecasts adjusted to 0.85% for this year.

In Europe, despite recent data suggesting a peak in wage pressures, policymakers are adamant about not implementing rate cuts before summer. Nevertheless, the market anticipates a pre-emptive cut, possibly as early as April, given the prevailing bleak economic outlook.

On the currency exchanges, the dollar has weakened due to lowered expectations of US rate cuts but remains largely within recent ranges due to a lack of strong market conviction. Next week's data is anticipated to have a limited impact, with interest rate differentials continuing to steer the narrative.

Yesterday's UK PMIs surpassed expectations, indicating that the technical recession in the UK may be over. The private sector saw its output expand for the fourth consecutive month, marking the fastest growth since May 2023. This positive trend is primarily attributed to a robust service sector, outperforming the Eurozone. Despite this, the GBP/EUR remains below €1.17, while the GBP/USD remains above $1.26, experiencing a significant reversal from a three-week high above $1.27. The currency pair appears poised for its most successful week in 2024.

While the headline PMI figures in the UK were stronger than anticipated, the focus for the Bank of England (BoE) remains on inflation. The accompanying PMI data warns that price pressures in the service sector remain elevated, potentially delaying any BoE rate cuts. Although services inflation and wage growth are expected to decrease by summer, short-term stability is anticipated, supporting the pound through favourable yield spreads. Currently, money markets predict just over 60 basis points of BoE rate cuts this year, a decrease from 75 basis points the previous week. UK 2-year yields have risen over 60 basis points since the beginning of the year, and the pound has appreciated against 60% of its 57 global peers month-to-date, up from 40% at the start of February.

Despite a dip in consumer sentiment in February, with households expressing a more pessimistic view of their financial situations and the economic outlook, the pound remains steady. GBP/USD seems to have found reliable support at its 50-week moving average, hinting at another upward movement within its two-month range. The next potential barrier is the 50-day moving average at $1.2675, followed by the 200-week moving average at $1.2850.

In addition to the preliminary Eurozone PMI data for February, the minutes from the European Central Bank's (ECB) policy meeting were disclosed yesterday, affirming the likelihood of future rate cuts, albeit not anticipated by Spring. The ECB aims to assess final first-quarter data on inflation, output, and wages before considering any decisive actions. Following a climb to a three-week peak, EUR/USD retreated, falling towards $1.08 and slipping below its 50-week moving average.