Pound Climbs amid Bets on Hawkish BoE Rate Hikes, Euro Volatile after ECB Hikes Interest Rates by 0.5%

  • Pound supported by bets on BoE rate hikes

  • US Dollar climbs amid global recession fears

  • Euro volatile after shock ECB rate hike

  • Russian cuts gas supplies to Europe by 50%

GBP/EUR Exchange Rate: EU Initiates Fresh Legal Action over NI Protocol

The Pound Euro (GBP/EUR) exchange rate firmed over the past seven days. The gains for the currency pair came despite continued political uncertainty within the UK. Monday saw the Conservative leadership contest reduce its field of candidates to the final two; Liz Truss and Rishi Sunak.

Brexit-related headwinds may have also capped gains for the Pound after the EU announced that it would be pursuing fresh legal action against the UK. The move came after the UK’s legislation designed to alter the Northern Ireland Protocol passed through the House of Commons.

The economic impact of widespread travel disruption across the UK may have also kept pressure on GBP.

Looking to the coming week, a fresh wave of rail strikes could limit gains for Sterling. Further tussles between Truss and Sunak could also dent confidence in the Pound.

GBP/USD Exchange Rate: Retail Sector Suffers amid Cost-Of-Living Crisis

The Pound US Dollar (GBP/USD) exchange rate traded erratically over the past week before ending on a high. Above-forecast UK inflation figures prompted a drop in Sterling on Wednesday. The figures added to concerns over the impact of the UK’s cost-of-living crisis.

Poor retail sales figures on Friday added to the Pound’s woes, although better than expected PMI figures may have helped to limit Sterling’s losses.

GBP also saw support throughout the week from hawkish bets on a 0.5% rate hike from the Bank of England (BoE).

Looking ahead, further expectations of aggressive action from the BoE could help the Pound to climb. The final reading of July’s PMIs could cap Sterling’s gains, however.

USD/GBP Exchange Rate: Fed Seeks to Reign in Rate Hike Bets Ahead of Meeting

The US Dollar Pound (USD/GBP) exchange rate saw some drastic shifts over the past seven days, before ultimately losing ground. The safe-haven ‘Greenback’ benefitted from risk-off flows throughout the week amid fears of a global recession. Friday prompted some losses in the US Dollar however after the latest S&P PMI figures indicated a large contraction in the US services sector in July.

An easing of bets on a super-sized interest rate hike from the Federal Reserve may have also pulled USD lower last week. After inflation hit its highest point since 1981, markets had begun to price in a 1% rate hike from the Fed. The past week saw Fed policymakers attempt to reign in these expectations ahead of the upcoming interest rate decision.

US Dollar investors will be keenly awaiting the Fed’s interest rate decision on Wednesday. Whilst a 0.75% rate hike has largely been priced in by markets, any hawkish comments from the central bank could see the currency climb.  A forecast recovery to US GDP growth could also prompt gains for the currency, as well as continued risk-off flows.

EUR/USD Exchange Rate: ECB Hikes Interest Rates by Surprise 0.5%

An above-forecast interest rate hike from the European Central Bank (ECB) lent fleeting support to the Euro late last week. EUR exchange rates spiked after ECB rose interest rates by 0.5% in response to soaring inflation across the Eurozone.

However these gains were quickly reversed in light of some cautious comments from ECB President Christine Lagarde. Poor PMIs for the Eurozone also weighed on the single currency at the end of last week.

Fears of a Eurozone recession and a cut-off to EU gas supplies weighed heavily on the EUR/USD exchange rate in the first half of this week.

Following a maintenance period, Russian gas supplier Gazprom confirmed that it would be cutting supplies delivered by the Nord Stream 1 pipeline by 50%. Fears of a gas shortage have reignited fears of an imminent Eurozone recession.

Looking ahead, inflation figures for Germany and the Eurozone could have a mixed effect on EUR. German inflation is forecast to cool with Eurozone figures expected to remain high. Any signs of cooling inflation could limit bets on future ECB rate hikes.

A slump to German and Eurozone GDP growth could also pull the Euro lower. Any further cuts to European gas supplies could also weigh on the single currency.

Gareth Monk

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