Despite some hawkish remarks from ECB members, the Euro is down versus the USD and the GBP.
Despite some weak reports, the pound is still doing okay.
Despite the very dismal -0.5% GDP reading, the BoE is probably more concerned about inflation indicators.
This week has seen a decline in risk appetite as a result of dramatically lower stock market reversals on Thursday and early Friday trade. This is true even if Fed speakers have intensified their appeal for disinflation and come across as dovish, while ECB members have increased their hawkish language. The EURUSD is still holding into its 50dma support around 1.071, but it is almost 3% down in February and appears weaker than it has in a while.
Pressure on EURUSD
One of the few currencies that still benefits from a hawkish central bank is the euro, and the ECB is not changing course like many of the others. The ECB meeting last week was a bit of a letdown since the message wasn’t as aggressive as some had hoped, but it’s apparent that there will be more increases, and this week’s inflation figures from Germany reinforced the need for additional tightening.
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The German inflation figures served as a delayed reminder to the eurozone that the ECB is engaged in a protracted battle against inflation.
Beginning in March, the bank will gradually reduce its €7.9 trillion balance sheet by around €15 billion each month until the end of the second quarter. However, this may be increased, and Austria’s Holzmann’s appeal for the ECB to “display its fangs” may mean speeding up the QT program.
Reinvestments would be totally stopped later this year, but the market already anticipates this, which would make financial circumstances much tighter. This week, as the Euro has continued to decline, we have seen that statements on the balance sheet may only have a limited impact. Although the EURUSD is maintaining support at 1.07, falling on good news is frequently a bearish omen, and the protracted uptrend may be nearing its conclusion.
Sterling is encouraged
Sterling has managed to display some modest relative strength this week despite dismal data, virtually exactly the opposite of what has happened with the Euro.
The month-over-month decline in the GDP for Thursday was worse than anticipated, at -0.5% against -0.3%. Some of this decline may be ascribed to the strikes, but it is apparent that the UK economy is struggling, and this is anticipated to persist into Q1 and possibly Q2. That implies that a recession might officially begin, which is bad news for the pound but may not have a big impact on the BoE’s policy choices because the battle against inflation may outweigh any occasional 0.2% growth. The bank’s decision to raise rates again may depend on the wage and pricing statistics released next week.