US Dollar Skyrockets Following Fed’s Hawkish Shift, BoE Speculation Buoys the Pound

GBP/EUR Exchange Rate: Pound Jumps to Two-Month High Ahead of BoE Rate Decision 

After faltering in the second half of last week in the wake of a disappointing UK retail sales release, the Pound to Euro (GBP/EUR) exchange has steadily strengthened, rising to its best levels since early April. 

This appreciation of Sterling comes amid some bullish expectations for the Bank of England’s (BoE) upcoming interest rate decision. 

While no policy changes are expected from the BoE this month, in light of a recent jump in UK inflationary pressure and on the wake of recent comments from BoE policymakers, GBP investors are predicting the bank will strike a more hawkish tone. 

This could see the Pound turbocharged in the second half of this week, particularly if the BoE’s forward guidance alludes to the potential tapering of its bond purchases in the coming months. 

GBP/USD Exchange Rate: Brexit Uncertainty Leaves Sterling Vulnerable 

The GBP/USD exchange rate struck a fresh one-month low over the past week, as ongoing Brexit concerns left the Pound on the back foot against a resurgent US Dollar. 

This comes as the UK and EU remain at odds over the Northern Ireland protocol, with GBP investors fearing the row could hurt future trade talks regarding the service sector. 

The pairing has begun to recoup some of these losses this week, amidst optimism that the final lifting of coronavirus restrictions in England will go ahead on 19 July. 

However, a slightly weaker-than-expected print in the UK’s latest services PMI may temper this rally going forward. 

USD/GBP Exchange Rate: US Dollar Catapulted to Two-Month High by Hawkish Fed 

The USD/GBP exchange rate rallied through the second half of last week, in the wake of the Federal Reserve’s latest rate decision. 

A surprisingly hawkish turn by the Fed, which saw policymakers revise their forecasts for the next rate hike from 2024 to 2023, as well as hint at future tapering talk, propelled the US Dollar sharply higher. 

However, the ‘Greenback’ has relinquished a good portion of these gains so far this week, as the currency was undermined by a bout of profit taking. 

Looking ahead, the US Dollar could attempt to rebound again later this week, as economists forecast the latest US durable goods release will report a healthy rebound in goods orders last month. 

EUR/USD Exchange Rate: Euro Undermined by Dovish ECB 

The EUR/USD exchange rate was met by some aggressive selling last week, as the sharp appreciation of the US Dollar placed considerable pressure on the Euro, due to the strong negative correlation between the pairing. 

The Euro’s initial attempts to rally this week then proved short-lived, in light of comments from European Central Bank (ECB) President Christine Lagarde, in which she suggested any ‘[monetary] tightening would be premature and would pose a risk to the ongoing economic recovery.’ 

However, some stronger-than-expected Eurozone PMI releases have subsequently lent some support to the single currency. 

Still to come this week is the latest IFO business climate survey from Germany. Will another improvement in business morale this month help to bolster the Euro? 

Matthew Andrews

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