Pound Firms on BoE Rate Hike Bets, US Dollar Rocked by Disappointing Payroll Print

GBP/EUR Exchange Rate: Pound Strikes New Pandemic High

The Pound Euro exchange rate trended broadly higher over the past week, with the pairing drawing particular support from the expected divergence in monetary policy between the Bank of England (BoE) and European Central Bank (ECB).

This comes as markets are pricing in an extremely high chance of the BoE raising interest rates when policymakers next meet in February.

However the uptick in Sterling was far from smooth, with elevated UK Covid cases and confirmation domestic service sector activity slowed sharply in December, undermining GBP/EUR late last week.

Looking ahead, the publication of the UK’s consumer price index next week could help to reinforce the Pound’s upward trajectory as another bump in inflation is likely to further bolster the odds of a February rate hike.

GBP/USD Exchange Rate: Sterling Bolstered as ‘Good Chance’ England Will Avoid Further Restrictions

The Pound US Dollar exchange rate rallied over the past week, with the pairing appreciating roughly a cent in the wake of the UK government’s confirmation it has no immediate plans to introduce new Covid restrictions in England.

Boris Johnson insisted there is a ‘good chance’ England can ‘ride out’ Omicron ‘without shutting down our country once again.’

The Pound then faced some headwinds at the start of this week as GBP investor confidence was shaken by renewed Brexit uncertainty, following Foreign Secretary Lizz Truss’ warnings that she is prepared to trigger Article 16 of the Northern Ireland protocol.

Going forward it is likely the Pound will remain sensitive to Covid and Brexit developments, potentially leading to fresh volatility in the pairing over the coming week.

USD/GBP Exchange Rate: US Dollar Rally Undermined by Disappointing Payroll Figures

The US Dollar has been supported over the past week by growing speculation that the Federal Reserve will hike interest rates earlier than previously thought. Many USD investors have begun to price in the next hike as early as March.

This publication of the Minutes from the Federal Open Market Committee’s (FOMC) December meeting helped to fuel these expectations after they suggesting interest rates may rise ‘sooner or at a faster pace than participants had earlier anticipated.’

However this confidence was shaken with the publication of the latest US non-farm payrolls as they revealed the US economy added fewer than half the number of jobs expected in December. This prompted a sharp pullback in USD exchange rates late last week.

While the US Dollar quickly bounced back, rising in tandem with US Treasury yields at the start of this week, it was subsequently dented again in the wake of comments from Fed Chair Jerome Powell.

Looking ahead, the immediate focus for USD investors will be on the publication of the latest US consumer price index. Will another surge in inflation last month help the US Dollar to make a more sustainable recovery?

EUR/USD Exchange Rate: Euro Struggles to Find Meaningful Gains despite Record Eurozone Inflation

The Euro US Dollar exchange rate has traded in a wide range over the past week, with the pairing briefly spiking last week following a pullback in the ‘Greenback’.

This uptick in the pairing was supported by the publication of the Eurozone’s latest inflation release, after a record surge in price growth last month was seen as contesting the ECB’s narrative that the recent spike in inflationary pressures in the bloc are ‘transitory’.

The Euro’s gains quickly faded this week as the record inflation reading failed to elicit a response from ECB President Christine Lagarde, leading investors to resume pricing in the policy divergence between the bank and its peers.

Looking ahead, a key focus for EUR investors over the next week will be the publication of Germany’s end of year GDP figures. Expect the Euro to struggle if Omicron and weak consumer confidence prompts 2021 growth to miss expectations.

Matthew Andrews

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