Pound Boosted as Markets Price in 0.5% BoE Rate Hike, US Dollar Falls as Fed Adopts Cautious Tone

GBP/EUR Exchange Rate: ‘Summer of Discontent’ Set to Worsen as Fresh Strikes Announced

The Pound Euro (GBP/EUR) exchange rate climbed higher over the past week. Major gains for the Pound (GBP) were likely capped by widespread industrial action, however. The UK saw fresh rail and bus staff strikes that hampered the country’s travel sector. Dock workers at Felixstowe also announced planned action for August.

Political uncertainty in the UK may have also kept pressure on Sterling last week. The Conservative leadership contest continued between the final two candidates: Rishi Sunak and Liz Truss. Markets remain uncertain as to the economic strategy of either candidate should they win the ballot.

Any announcements of additional strikes could add to fears over the UK’s ‘summer of discontent’ in the week ahead. Additionally, any developments in the leadership contest could prompt shifts in the currency.

GBP/USD Exchange Rate: Markets Price in 0.5% Rate Hike from BoE

The Pound US Dollar (GBP/USD) made gains in the past seven days despite a poor outlook for the UK economy. Monday’s final reading of the July PMI for the country’s manufacturing sector saw output and orders fall at their fastest rate since May 2020, pushing GBP lower.

Bets on a 0.5% rate hike from the Bank of England (BoE) at their next meeting may have lent support to Sterling over the past seven days. Markets increasingly priced in a more aggressive interest rate rise from the central bank. The move would represent the BoE’s single largest increase since 1995.

The Bank of England’s interest rate decision on Thursday may boost the Pound despite a 0.5% hike being largely priced in. If the central bank takes a more cautious tone, then Sterling could slip, however. Any notable comments in the post-announcement MPC meetings may also cause movement in the currency.

USD/GBP Exchange Rate: US Economy Falls into Technical Recession

The US Dollar Pound (USD/GBP) exchange rate lost ground over the past seven days. Despite a largely risk-off market mood, the US Dollar saw steady losses following the Federal Reserve’s interest rate hike on Wednesday amid a cautious tone from the central bank. GDP figures on Thursday may have also seen USD drop after a second-consecutive quarter of negative growth for the US economy, pushing the US into a technical recession.

Friday’s above-forecast rise to the PCE price index, the Fed’s preferred measure of inflation, did help the US Dollar to stage a mild recovery. These gains may have been tempered by July’s manufacturing PMI however, as factory activity fell to a new two-year low.

Friday’s employment data could be a mixed bag for the US Dollar. A forecast fall to non farm payrolls figures could heighten recession fears and weigh on USD. On the other hand, July’s unemployment rate is expected to remain low which could bolster Fed rate hike bets. If July’s rate of inflation slips as forecast on Friday then it could limit these bets, however.

EUR/USD Exchange Rate: Eurozone Recession Fears Grow as Energy Crunch Worsens

The Euro US Dollar (EUR/USD) exchange rate climbed over the past seven days despite renewed Eurozone recession fears. The possibility of an energy crisis across Europe continued to stoke concerns the trading bloc could suffer this winter. Russian gas supplier Gazprom continued to limit supplies available through the Nord Stream 1 pipeline.

Some positive data for the Eurozone helped to bolster the single currency, however. Friday saw Eurozone GDP and inflation figures print above forecasts. Sustained lows for Eurozone unemployment may have also helped to bolster EUR. On the other hand, an unexpected slump in German retail sales on Monday may have curtailed some of these gains.

Looking ahead, Wednesday is set to see German inflation remain at 7.6%. The figures could push the Euro higher amid renewed bets on further interest rate hikes from the European Central Bank (ECB).

Gareth Monk

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