US Dollar Surges following Fed Announcement, Pound Strengthens on Upbeat Inflation

Pound (GBP) Jumps on High Inflation Figures

The Pound (GBP) climbed yesterday after the UK published impressive CPI figures for May, with year-on-year inflation jumping by 2.1%, it’s highest level in almost two years.

The upside in Sterling came despite the delay to the UK’s lifting of lockdown measures and growing tensions between the EU and the UK over the Northern Ireland protocol, which have both capped GBP gains in recent days.

With no notable data releases coming out of the UK today, coronavirus and Brexit headlines are likely to drive most movement in the Pound.

Euro (EUR) Dented by Underwhelming Wage Growth

The Euro (EUR) was muted through yesterday’s trading session after the Eurozone’s wage growth slowed to 2.2% in the first quarter of 2021, less than half the forecast growth of 4.6%.

The single currency also saw modest losses on the back of comments from the Governor of the Central Bank of Ireland Gabriel Makhlouf, who warned that the eventual tapering of financial support could put pressure on businesses and mortgage borrowers.

Turning to today, the Euro faces strong headwinds following the Federal Reserve’s policy announcement last night, with a switch to a more hawkish stance propelling the US Dollar (USD) skyward and seeing EUR/USD hit a two-month low.

The Euro could find some support later this morning, however, as the Eurozone’s finalised inflation rate figures are forecast to confirm a 2% rise in inflation last month while construction output in April is expected to have jumped from 18.3% to 40% in April.

US Dollar (USD) Soars on FOMC Projections

After trading sideways for most of yesterday, the US Dollar surged following the Federal Reserve’s June rate decision, with the bank signalling a more hawkish outlook on monetary policy.

While the Fed left interest rates unchanged, Jerome Powell, Chair of the Federal Reserve, revealed the bank’s outlook on inflation had changed, saying that they were ‘prepared to adjust policy if inflation expectation moved too high’.

This was a change from the Fed’s previous stance that the ongoing surge in inflation was transitory, with Powell suggesting that ‘inflation could turn out to be higher and more persistent than we expect.’

USD investors also cheered the bank’s more hawkish view on future interest rates hikes, with policymakers now seeing the next rate hike as taking place in 2023 rather than 2024.

Looking ahead, the US Dollar is likely to remain strong throughout the day, with the upcoming US unemployment figures potentially adding to USD’s upside.

Canadian Dollar (CAD) Recovers on Inflation Figures

The Canadian Dollar (CAD) slipped at the start of yesterday’s trading session before bouncing back in the afternoon on rising oil prices and Canada’s high inflation figures.

The oil-sensitive ‘Loonie’ was initially dragged down as WTI crude dipped by almost $1, but it regained its losses after crude recovered.

CAD was also buoyed by Canada’s inflation figures for May. Inflation hit 3.6%, its biggest rise in a decade, just beating expectations of a 3.5% jump.

Looking ahead, the Canadian Dollar may struggle today due to the strength in the US Dollar, but Canada’s ADP jobs figures could limit the downside as employment is set to increase again by 250,000.

Australian Dollar (AUD) Rebounds on Strong Jobs Data

The Australian Dollar (AUD) slumped following the Federal Reserve decision, as a bearish market mood dampened demand for the risk-sensitive ‘Aussie’.

However, AUD managed to claw back some gains overnight on the back of impressive employment data, after domestic unemployment was shown to have dropped to a new post-pandemic low of 5.1% last month.

New Zealand Dollar (NZD) Rallies on GDP Growth

Likewise, the New Zealand Dollar (NZD) fell on the Fed’s hawkish comments, but bounced back in overnight trade following impressive GDP figures.

The GDP growth rate for the first quarter of 2021 jumped to 1.6% from the previous quarter’s contraction of 1%, and well above the expected rise of 0.5%.

Samuel Birnie

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