US Dollar Soars as Markets Bet on Aggressive Fed Rate Hike, Pound Slumps on Brexit and Economic Jitters

  • Pound slides lower as NI Protocol tensions intensify
  • US Dollar boosted by aggressive Fed rate hike bets
  • Euro sees sell-off after ECB interest rate decision
  • Fed and BoE Rate hikes to stoke volatility

GBP/EUR Exchange Rate: EU Threatens Legal Actions over NI Protocol

The Pound Euro exchange rate ended the past seven days at its lowest point since April 2021. The poor forward outlook for the UK’s economy continued to pull the currency pair lower.

A report from the British Chambers of Commerce (BCC) on Wednesday predicted that the country’s economy would ‘grind to a halt’ this year, before contracting drastically.

Renewed of Brexit-related tensions also likely contributed to the Pound’s fall. The UK government continued to push ahead with its legislation designed to scrap elements of the Northern Ireland Protocol. The move prompted EU officials to threaten legal action against the UK should they push ahead with the potential breach of international law.

Brexit developments could continue to pull the currency pair lower if the relationship between the UK and EU deteriorates further. The country’s cost-of-living crisis could also continue to dent confidence in the Pound, further harm the country’s outlook, and see the currency pair fall.

GBP/USD Exchange Rate: UK GDP Falls Unexpectedly

The Pound US Dollar exchange rate fell to its lowest point since February 2020 over the past week. Monday saw a sharp sell-off in the Pound after UK GDP fell unexpectedly by 0.3% in April. Analysts highlighted the winding down of the UK’s Covid-19 vaccination programme as a primary cause, although the figures still stoked UK recession fears.

Poor employment figures also saw the currency pair tumble on Tuesday. The UK’s unemployment rate bucked forecasts to rise to 3.8% in the three months to April. Average wages also fell at their fastest rate for more than two decades. The data saw investors pare back bets on a more aggressive rate hike from the Bank of England (BoE).

Looking ahead, the BoE’s interest rate decision on Thursday could weaken the Pound US Dollar exchange rate if they act as cautiously as markets predict. UK CPI figures on Wednesday could also weaken Sterling if inflation continues to climb.

USD/GBP Exchange Rate: Investors Hoping for 75bps Fed Rate Hike

A risk-off market mood over the past seven days helped the US Dollar Pound exchange rate to climb to its highest point in over two years. A fresh wave of Covid-19 cases in China prompted fresh fears from investors of a global economic slowdown.

The US Dollar also benefitted from a protracted sell-off of the Euro following the European Central Bank’s (ECB) interest rate decision on Thursday.

The ECB’s decision looked particularly dovish in comparison to continued bets on an aggressive rate hike from the Federal Reserve this week. Friday’s US inflation figures gave further evidence to investors’ hopes for a 75bps rate hike. Inflation rate came in well above forecast, remaining high at 8.6%.

All eyes are now on the Fed’s impending interest rate decision. An aggressive hike could see the exchange rate jump. A speech from Fed Chair Jerome Powell on Friday could also bolster the exchange rate if he gives any hawkish signals.

EUR/USD Exchange Rate: ECB Interest Rate Decision Underwhelms Investors

The Euro US Dollar exchange fell drastically over the past seven days following the European Central Bank’s (ECB) interest rate decision on Thursday. Strong GDP figures for the Eurozone on Wednesday had seen the currency pair initially trend higher.

The central bank’s signal that they would raise interest rates by 25bps in July initially buoyed the Euro. However this was quickly reversed amidst fears of fragmentation in the Eurozone.

A recovery to economic sentiment across the Eurozone and Germany helped the Euro US Dollar exchange rate to recover some of its losses on Tuesday.

Looking ahead to the next seven days, German PPI figures on Monday could prompt some movement in the EUR/USD exchange rate. Additionally, a forecast uptick to Eurozone inflation on Friday could help the Euro to recover some of its losses.

Gareth Monk

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