EUR (1.072) ▼

▪ The strengthening of the EUR against the USD to 1.098 (Feb 2) was short lived due to a rebound in USD index (DXY) amid a sharp surge in US non-farm payrolls. The bloc’s currency extended its losses and trade near the 1.070 level as the DXY was further propelled by continued hawkish comments from Fed officials, solid US retail sales reading (3.0% MoM; Dec: -1.1%) and unfavourable European data.

▪ The EUR may struggle for direction and weaken against the USD in the next few weeks as the DXY is seen to consolidate around current level amid Fed’s solidifying higher-for-longer narrative. Domestically, lack of European Central Bank’s policy guidance and pro-EUR catalysts may also hurt the single currency, prompting it to trade between 1.06 – 1.07 against the greenback.

GBP (1.207) ▼

▪ Despite a mixed signal from US core CPI reading (actual: 0.4% MoM or 5.6% YoY vs. consensus: 0.4% MoM or 5.5% YoY), the pound was trading broadly weak against the USD, mainly due to increasing market expectations that the Fed may continue to hike and hold for longer. On top of that, the GBP was also pressured by UK's cooler-than-expected core CPI reading of 5.8% YoY (consensus: 6.2%). However, losses were partially capped by strong wage growth data.

▪ The GBP is expected to continue to be influenced by important macroeconomic data (i.e. GDP growth, retail sales and labour) that may provide a clearer signal of the Bank of England’s (BoE) next move. In which a more bearish reading may prompt the BoE to pause, weakening the GBP. However, any pro-GBP sentiment after the unveiling of the Spring Budget (March 15) may help to prop the currency.

Source: Kenanga Research - 16 Feb 2023