Last week was a positive one for Sterling, with stronger-than-expected employment figures, higher inflation (which pushes back expectations of interest rate cuts), and strong retail sales data. Since much of this wasn’t fully priced into the market, Sterling outperformed across the board, creating excellent buying opportunities against the Euro, U.S. Dollar, and other major currencies.
German Elections and Their Market Impact
As I write this on a rainy Sunday evening, exit polls for the German election have just been released. By the time you read this, the full results will likely be confirmed, but here’s the current picture:
- German Conservatives (CDU/CSU): 29%
- AfD (Alternative for Germany): 19.5%
- SPD (Social Democrats): 16%
With this result, it seems likely that the German Conservatives will form a coalition with the SPD, a scenario that could inject stability into the Euro and European markets. If a coalition agreement is reached quickly, EUR/USD and EUR/GBP could strengthen when markets open on Monday. However, if coalition talks become complicated or the final results differ significantly from the exit polls, we could see the opposite reaction—a weaker Euro, potentially pushing GBP/EUR higher and EUR/USD lower.
What’s Driving the Markets This Week?
As we head into the last week of February, there are several key events that could bring volatility.
Monday kicks off with a series of Bank of England (BoE) speeches, which could provide further insight into the UK’s monetary policy outlook. While markets have recently pushed back expectations of immediate rate cuts, any dovish rhetoric from BoE policymakers could create short-term pressure on Sterling. Meanwhile, the fallout from the German election will be a major market focus, alongside the release of Eurozone inflation data. Forecasts suggest core inflation will come in at 2.7% and headline inflation at 2.5% year-on-year, slightly higher than the previous reading. A stronger-than-expected inflation print could reinforce expectations that the European Central Bank (ECB) will delay rate cuts, potentially offering some support to the Euro.
Tuesday sees the release of Germany’s GDP data, which is expected at -0.2%. Given that Germany accounts for 40% of the Eurozone economy, this figure could be very damaging for the Euro if it confirms economic contraction. A weak reading would likely fuel speculation of ECB rate cuts sooner rather than later, leading to potential downward pressure on EUR/USD and EUR/GBP.
On Wednesday, European consumer confidence data is set for release. While it’s expected to be negative, there is an expectation for a slight improvement compared to the previous month. That said, the data is still in contraction territory, which is unlikely to offer much support for the Euro. Later in the day, U.S. weekly jobless claims data will be released. U.S. labor market figures have consistently beaten expectations in recent months, and if the trend continues, we could see renewed strength in the Dollar as markets reassess the Federal Reserve’s next policy move.
The week wraps up on Friday, beginning with France’s GDP data and Germany’s employment figures. If German employment numbers show signs of weakening, it could further exacerbate Eurozone concerns and put downward pressure on the Euro. Later in the day, U.S. trade balance data is expected, alongside the PCE Price Index—one of the key inflation metrics closely monitored by the Fed. If inflation remains sticky, the Fed may maintain its cautious stance on rate cuts, which could boost the Dollar heading into the weekend.
Final Thoughts
This week’s currency markets are likely to be shaped by political developments in Germany, key economic data from the Eurozone, and ongoing U.S. economic resilience.
💷 Sterling traders should watch for BoE commentary on Monday, which could provide further direction for GBP exchange rates.
💶 Euro traders should focus on Tuesday’s German GDP release and Friday’s employment data, as both could be key drivers for EUR volatility.
💵 Dollar traders will be watching U.S. labor market data and inflation trends, as they will influence expectations for Fed policy moving forward.
With plenty of potential volatility ahead, timing your transactions wisely could make a significant difference. If you have any upcoming currency exchange requirements, feel free to reach out for guidance on the best strategy.