GBP/EUR Exchange Rate: Pound Hits 23-Month High Vs Euro
After climbing to a 23-month high at the end of last week, the Pound Euro exchange rate has retreated slightly at the start of this week’s session.
Markets widely anticipating the Bank of England (BoE) to raise interest rates from 0.25% to 0.5% in an attempt to bring down soaring inflation has underpinned Sterling support.
With investors appearing to have priced in a rate hike at the central bank’s policy meeting tomorrow, the focus will shift to its forward guidance and how aggressively the BoE will tighten monetary policy through 2022.
The expected interest rate rise tomorrow may also signal the start of quantitative tightening, with a reduction of the BoE’s £875 billion asset holdings used to provide support during the pandemic.
GBP/USD Exchange Rate: Pound Rebounds despite UK Political Uncertainty
The Pound US Dollar exchange rate has surged higher through the start of this week’s session, rebounding from losses GBP/USD suffered in the second part of last week.
Ongoing political uncertainty and doubts over UK Prime Minister Boris Johnson’s future weighed heavily on Sterling as the furore continues over Downing Street parties.
However, the Pound has rebounded this week after the full report into Downing Street lockdown breaches was delayed, giving Johnson more time to avoid a vote of no confidence from Conservative Party MPs.
Looking ahead, while the police investigation into any potential rule breaking continues, the full release of the Sue Gray report, or a vote of no confidence in the Prime Minister will likely stoke volatility in GBP/USD.
USD/GBP Exchange Rate: US Dollar Retreats as Risk Appetite Recovers
The US Dollar Pound exchange rate surged to a one-month high last week after Fed chair Jerome Powell struck a more hawkish than expected tone that hinted at aggressive monetary policy tightening of multiple rate hikes and a drastic reduction in the bank’s balance sheet.
Better-than-expected US GDP for the fourth quarter of 2021 further bolstered USD, with strong growth of 6.9%, above forecast of 5.5%. The data also showed the US economy grew by 5.7% in 2021, the strongest since 1984.
However, the US Dollar has fallen back this week after increased risk appetite dented safe-haven demand for the ‘Greenback’, and several Fed policymakers cooled market jitters of overly aggressive monetary policy tightening.
USD exchange rates also came under pressure on Tuesday as the ISM manufacturing PMI indicate the sector grew at its slowest pace in 15-months, and JOLTs jobs data revealed job vacancies rose in December.
With the ISM non-manufacturing PMI for January also expected to show slowing business activity, the US Dollar may extend its losses on disappointing non farm payrolls data released on Friday.
EUR/USD Exchange Rate: Euro Strengthens as Inflation Surges
The Euro US Dollar has recovered from last week’s 19-month low, and continues to firm this week, benefitting from a pullback in the US Dollar due to the negative correlation in the pairing.
Worse-than-expected German GDP data for the fourth quarter of last year showed a -0.7% contraction, while also indicating the German economy is -1.5% below pre-pandemic levels.
However, falling Eurozone unemployment to a record low of 7% has helped EUR/USD recover this week despite Eurozone growth in the fourth quarter of last year slowing to 0.3%
Meanwhile, Eurozone consumer price index data released today revealed inflation unexpectedly soared to a record 5.1% in January, fuelling bets the European Central Bank (ECB) may alter its policy stance after insisting inflation will be ‘transitory’.
If the ECB does hint at a more hawkish stance and show willingness to tighten monetary policy, the Euro may extend its gains following the central bank’s meeting and interest rate decision on Thursday.