Pound Slumps after Inflation Hits Highest Point since 1982, EUR/USD Tumbles Below Parity

  • Pound slips as inflation hits double digits.

  • US Dollar bolstered by Fed rate hike bets.

  • Euro slumps as gas prices soar.

  • Fed’s Jackson Hole summit in focus.

GBP/EUR Exchange Rate: Inflation Hits 40-Year High amid Soaring Energy Costs

The Pound Euro (GBP/EUR) exchange rate tumbled in the latter half of last week, before later staging a recovery. The Pound saw drastic losses on Wednesday after inflation hit 10.1% in July. The data stoked recession fears and weighed on Sterling.

An uptick in retail sales on Tuesday helped the currency to reverse some of its losses at the end of the week.

The inflation figures also supported increased bets interest rate hikes from the Bank of England (BoE). This in turn may have also helped Sterling to rally earlier this week.

Looking ahead, distributive trades figures for August could weigh on the currency if they print as forecast on Thursday. The reading is expected to report another slump in retail sales volumes this month.

GBP/USD Exchange Rate: Felixstowe Dock Workers Begin 8 Day Strike

The Pound US Dollar (GBP/USD) exchange rate slumped over the past seven days. Widespread industrial action across the UK may have contributed to Sterling’s losses. Alongside strikes in the rail sector, workers at container port Felixstowe began an 8-day strike over the weekend.

The UK’s cost-of-living crisis and political uncertainty also weighed on the Pound over the past week. Analysts remained concerned over the impact of the upcoming rise in the country’s energy price cap. The UK’s government remained divided on how to tackle the crisis.

The impact of the energy price cap increase on Friday could prompt further losses for Sterling. If UK ministers announce further support for households, then it could help to bolster confidence in the currency.

USD/GBP Exchange Rate: Fed Rate Hike Bets Increase as Jackson Hole Conference to Get Under Way

The US Dollar Pound (USD/GBP) exchange rate rose over the past seven days to hit its highest point since March 2020. The ‘Greenback’ saw a boost from sustained bets on interest rate hikes from the Federal Reserve.

An above-forecast rise to retail sales on Wednesday may have also helped to bolster USD exchange rates.

However the US Dollar faced a major setback with the publication of the latest US PMI figures. US business activity surprised to the downside, falling to a 27-month low and prompting investors to pare back Fed rate hike bets.

Second quarter GDP figures are expected to confirm the US economy shrank in the second quarter pushing the US economy into a technical recession and likely weakening USD demand.

However the US Dollar could still strengthen if Fed Chair Jerome Powell strikes a hawkish tone at his speech at the US central bank’s Jackson Hole symposium later in the week.

EUR/USD Exchange Rate: Gas Prices Hit Record Highs

The Euro US Dollar (EUR/USD) exchange rate fell back below parity this week. The Eurozone’s energy crisis continued to weigh on the single currency as EU gas prices hit record highs. The rise came after Russian supplier Gazprom announced unscheduled maintenance for the Nord Stream 1 pipeline.

A second consecutive month of contraction in the Eurozone’s private sector may have also pushed EUR lower over the past week. The trading bloc’s service sector struggled in August, hitting a 17-month low.

Looking ahead, a predicted fall in German business confidence on Thursday could prompt further losses in the Euro.

Another key focus for EUR investors will be the Eurozone’s consumer price index. Will another uptick in inflation bolster the odds for another 50bps rate hike from the European Central Bank (ECB) and help the Euro to reverse some of its recent gains?

Gareth Monk

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