Daily Forex Market Report 06-Dec-2022: USD gains against GBP and euro, but rally may be short lived

Yesterday's UK services PMI data yielded few surprises- with cost pressures showing little signs of abating and operating expenses rising, output dropped to levels last seen in January 2021.

So it didn’t come as a shock to see a weakening of the pound against the US dollar.

GBP/USD fell 0.8% to 1.219 in Monday’s session, and continued to fall another 10 pips this morning.

GBP/USD contracts, but it could be a short-term price movement – Source: capital.com

But the pair is unlikely to remain in a downward trend. Although the US dollar index (DXY) rose in the last session, in part due to a surprisingly strong services reading, the index is on a bearish course in the long run.

A black Friday boost saw a 4.1% jump in monthly UK retail sales in data released this morning, which has already proved a catalyst for gains against the greenback.

Sterling took less of a hit against the euro. While EUR/GBP rose 0.4% to 86.08p on Monday, the pair has since cut back to 85.97p in today’s Asia trading window.

The pound is also looking strong against the yen, having already jumped 0.6% to 167.47 in the GBP/JPY pair this morning.

Greenback’s solid performance in the past could of days has caused EUR/USD to edge back from its recent five-month high, with the pair dipping 0.45% to 1.049 yesterday and continuing the trend downwards to 1.047 in today’s Asia trading hours.

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Employment data also failed to impress, while the goods trade balance widened its deficit more than expected.

As such, Federal Reserve chair signalled a slower pace of interest rate hikes in the months to come.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell, though he did note that the terminal rate could be "somewhat higher" than the 4.6% indicated by in the September projections.

EUR/GBP closed the Wednesday session at .863, around 12 basis points below the intraday high, though the euro has the slight upper hand this morning having added a few pips.

Yesterday’s EU headline inflation data came in at a flat 10% against a 10.3% forecast, though that figure is still unacceptable high given the 2% target, so excessive rate hikes are likely to stay on the agenda in the coming months.

Combined with Powell’s dovish overtures, EUR/USD jumped a full percentage point to 1.042 yesterday, and continued to rally another 0.33% to 1.045 in today’s Asia window.

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