Pound Drops as UK Inflation Reaches 40-Year High, Euro Bolstered as Lagarde Signals Imminent ECB Rate Hikes

  • UK inflation hits 40-year high
  • Federal Reserve indicates commitment to aggressive rate hikes
  • ECB shocks markets as Lagarde signals July and September rate hikes
  • Global inflationary pressures weigh on private sector growth

GBP/EUR Exchange Rate: UK Inflation Highs Prompt Recession Fears

The Pound Euro exchange rate fell initially after UK inflation hit a 40-year high of 9% on Wednesday. The figures further heightened fears of a 2022 recession in the country amid the country’s cost-of-living crisis, likely denting confidence in the Pound. Sterling likely also fell as investors pared back their expectations of further rate hikes from the Bank of England (BoE).

A surprise boost to the UK’s April retail sales on Friday helped to bolster the currency pair. An increase in supermarket alcohol and tobacco spending prompted the rise as UK households limit services spending. Tuesday’s sharp slowdown to private sector growth was evidence of this and likely pulled Sterling lower as inflationary pressures limited household spending.

Looking to the next seven days for the Pound, Wednesday forecast fall to May’s manufacturing output could place further pressure on the currency. Additionally, any further signals from the BoE on rate hikes could affect Sterling.

GBP/USD Exchange Rate: Northern Ireland Protocol Tensions Continue

The Pound US Dollar exchange rate made steady gains over the past seven days. Significant gains for the pair may have been limited by Brexit-related tensions however. Fears of a trade war between the UK and EU continued to escalate after UK Foreign Secretary Liz Truss threatened to undermine the Northern Ireland Protocol through legislative efforts.

The UK government’s ‘partygate’ crisis likely also weighed on Sterling throughout the week. Details of further illegal gatherings featuring PM Boris Johnson were steadily leaked to the press, harming confidence in his premiership. The government’s poor response to the country’s cost-of-living crisis may have also undermined faith in the Pound.

Looking ahead, the imminent publication of the Sue Gray report into the ‘partygate’ scandal could prompt movement in the currency. Additionally, a further breakdown in negotiations between the UK and EU could pull the pair lower.

USD/GBP Exchange Rate: Powell Signals Willingness to Continue Rate Hikes

The US Dollar Pound currency pair slipped over the course of the past seven days. The pair saw an initial boost despite US jobless claims printing higher than expected on Thursday. The US labour market remains tight however, and solidified bets of a rate hike from the Federal Reserve. This likely helped boost the US Dollar.

The Federal Reserve’s continually hawkish stance underpinned the US Dollar over the past seven days. Fed Chair Jerome Powell has continually signalled that the central bank will raise interest rates as often as necessary to curb soaring inflation. Multiple Fed policymakers have also supported such a rate hike schedule.

The release of FOMC minutes later today could help push USD higher should they give further hawkish indicators. A drop to GDP growth on Thursday could limit any major gains for the US Dollar, however.

EUR/USD Exchange Rate: ECB Signals Likely July & September Rate Hikes

The Euro US Dollar exchange rate made gains over the past seven days. The European Central Bank’s (ECB) surprise turnaround in regards to interest rates helped boost the pair despite the impact of the war in Ukraine. ECB President Christine Lagarde repeatedly signalled that interest rate hikes in July and September were very likely.

Global inflationary pressures likely weighed on the single currency over the past seven days, however. German PPI figures on Friday saw an increase to business costs, whilst Tuesday’s Eurozone and German PMIs both indicated a slowdown to private sector growth.

An uptick to Eurozone inflation on Tuesday could push the currency pair higher amid increased bets of an ECB rate hike. A drop to German retail sales on Wednesday could also push these bets higher.

Gareth Monk

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