Pound Drops as Wages Struggle to Keep Pace with Inflation, Euro Regains Lost Ground amid Hints of 0.5% ECB Rate Hike

  • Pound drops despite rise to inflation

  • US Dollar slips as Fed reigns in 1% rate hike bets

  • Euro climbs amid reports of possible 0.5% ECB rate hike

  • Will Russia restart Eurozone gas supplies as indicated?

GBP/EUR Exchange Rate: BoE Saunders Hints at Further Rate Hikes

The Pound Euro (GBP/EUR) exchange rate saw an early fall over the past seven days. Political uncertainty likely weighed upon the Pound after the start of the UK’s leadership contest. Markets remained unsure as to the economic direction of each candidate.

Sterling managed to regain some of its losses off the back of some hawkish Bank of England (BoE) comments, however. Policymaker Michael Saunders signalled that the cycle of tightening may ‘still have some way to go’.

Looking ahead, the field of candidates in the Conservative leadership contest is expected to narrow to a final two. The process could continue to dent confidence in GBP. Brexit-related headwinds could also limit gains for the currency.

GBP/USD Exchange Rate: UK Inflation Hits Fresh 40-Year High

The Pound US Dollar (GBP/USD) exchange rate reversed its fortunes to end the past seven days higher despite a weakened Pound. A surprise return to growth for the UK in May saw Sterling spike on Wednesday. A lack of significant data then saw the currency left to the whim of market sentiment, where a largely risk-off mood pushed GBP lower.

A mixed jobs report on Tuesday saw the Pound drop further. On the one hand, unemployment remained close to a 48-year low at 3.8%. This may have increased bets on GBP amid signs of a tight labour market. On the other, figures indicated that wage growth continued to struggle to keep pace with inflation. Wednesday saw Sterling slip further after inflation rose above-forecasts, placing further pressure on UK households amid the country’s cost-of-living crisis.

A drop to retail sales figures on Friday could see the currency fall further if it impacts the country’s economic outlook. Also on Friday, a drop to private sector growth could pull the Pound lower.

USD/GBP Exchange Rate: Inflation Climbs to Highest since 1981

The US Dollar Pound (GBP/USD) exchange rate made shed many of its earlier gains over the past seven days. The US Dollar (USD) saw gains early last week after inflation and PPI figures rose above-forecasts. The data increased expectations of aggressive interest rate hikes from the Federal Reserve. Markets even began to price in the possibility of a 1% rate hike. This, as well as a risk-off market mood, helped to push USD higher.

A corrective pullback saw the currency fall lower from Friday onwards. Additionally, Fed policymakers sought to reign in market expectations of a 1% rate hike. A recovery to risk appetite also saw USD fall.

Looking to the next seven days, investors will be most keenly focused on the Fed’s interest rate decision on Wednesday. A bumper rate hike could see USD soar. Ahead of this, a drop to private sector growth on Friday could limit any upward movement for the currency.


EUR/USD Exchange Rate: Expectations of 0.5% ECB Rate Hike Increase

The Euro US Dollar (EUR/USD) exchange rate managed to recover from earlier losses over the past seven days. The single currency struggled amid fears of an energy supply crisis throughout Europe. German officials remained convinced that Russia would not reengage gas supplies through the Nord Stream 1 pipeline.

The Euro saw a boost from Monday onward. The single currency saw increased bets amid signals that the European Central Bank (ECB) may raise interest rates above expectations. Anonymous sources reported that a 0.5% rate hike was being considered by the ECB. Additionally, EUR saw a boost from reports that Russia would restart the Nord Stream 1 pipeline.

Looking ahead, an above-forecast ECB rate hike on Thursday could help EUR to climb higher. On the other hand, a drop to Eurozone private sector growth on Friday could curb any gains.

Gareth Monk

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