Coronavirus Concerns Weigh on the Pound, Dovish Fed Expectations Weaken USD Exchange Rates

GBP/EUR Exchange Rate: Pound Retreats from One-Month High amidst Coronavirus concerns

After striking a one-month high last Wednesday in the wake of the UK’s latest GDP release, the Pound Euro (GBP/EUR) exchange rate has been mostly on the defensive.

This comes amidst rising concerns over the spread of the Indian variant of the coronavirus throughout the UK and how it could impact the government’s roadmap for reopening the economy.

While the government’s decision to go ahead with the latest phase of reopening offered some support to the GBP/EUR exchange rate at the start of this week, this proved fleeting as some health experts questioned the decision.

Boris Johnson has said the situation with the new strain is ‘under very careful, close review’, with the direction of the Pound going forward likely to be dependent on whether or not the government opts to delay the next phase of easing.

GBP/USD Exchange Rate: Pound Strikes Two-Month High on Positive Data

After retreating from its best levels in the second half of last week’s session, the GBP/USD exchange rate has made some steady gains so far this week, thanks to some positive UK data.

The Pound was able to take advantage of a pullback in the US Dollar on Tuesday, courtesy of the UK’s latest jobs figures, after they reported a surprise drop in unemployment in March.

Sterling sentiment has also been buoyed by a sharper-than-expected rise in domestic inflation last month, amidst speculation it will put additional pressure on the Bank of England (BoE) to tighten its monetary policy.

Still to come this week, we have the publication of the UK’s latest retail sales figures and PMI releases.

These could also reflect well on the Pound US Dollar exchange rate, with another month of strong sales growth in April, and the continued expansion of the manufacturing and service sectors this month, likely to bolster growth expectations for the second quarter.

USD/GBP Exchange Rate: Dovish Fed Expectations Weigh on the US Dollar

The USD/GBP exchange rate soared in the middle of last week as USD investors seized on the latest US consumer price index, after a sharp jump in inflation prompted some traders to revise their expectations for the next interest rate hike from the Federal Reserve.

However the US Dollar has steadily relinquished these gains over the past week, amidst speculation the Fed will be willing to continue to dismiss the rise as ‘transitory’.

This comes in part due to a weaker-than-expected US retail sales release in April, as well as comments from Federal Reserve Vice Chair Richard Clarida, in which he suggested that last month’s disappointing payroll figures suggest that the US economy is not yet at the point in which the bank can start scaling back its stimulus programme.

The immediate focus for USD investors will be the publication of the minutes from the Fed’s latest policy meeting later this evening. With these potentially putting more pressure on the US Dollar if they reinforce the bank’s current dovish bias.

EUR/USD Exchange Rate: Euro Firms amidst Improving Outlook in the Eurozone

The EUR/USD exchange rate has made steady gains over the past week, as the Euro was able to capitalise on a broad selloff of the US Dollar thanks to an improving outlook in the Eurozone.

This comes as more countries start to ease coronavirus restrictions and the EU’s vaccine rollout continues to accelerate.

The publication of the minutes from the European Central Bank’s (ECB) April policy meeting as policymakers expressed their confidence that the Eurozone will return to growth in the second quarter.

Looking ahead, the spotlight for EUR investors in the second half of this week will be the publication of the Eurozone’s latest PMI figures. These could provide an additional boost to the Euro on Friday if economic activity in the bloc’s private sector continued to improve this month.

Matthew Andrews

Contact Matthew Andrews

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