Pound Extends Recovery on Government U-Turn, US Dollar Slips in Risk-On Trade

GBP/EUR Exchange Rate: Pound Extends Recovery Following Government U-Turn

The Pound Euro exchange rate rallied sharply in the second half of last week after the Bank of England (BoE) stepped in to stabilise UK bond markets with a £65bn intervention.

The move helped to offset pressure stemming from the International monetary Fund’s (IMF) criticism of the UK government’s plans to fund sweeping tax cuts through increased borrowing.

After firming through the latter half of last week, the Pound then extended its recovery at the start of this week after Chancellor Kwasi Kwarteng scrapped his plans to cut taxes for the highest earners.

While this was a relatively small part of Kwarteng tax cut package, it fuelled hopes the government may be open to rethinking other parts of its fiscal policy. Any sign of which could help to underpin the Pound over the coming week.

GBP/USD Exchange Rate: Pound Rebounds to Pre-Budget Levels

The Pound US Dollar exchange rate rallied sharply over the past seven days. The pairing appreciating by roughly eight cents to climb back above its pre-budget levels.

The start of this recovery in the GBP/USD exchange rate was triggered by the timely intervention from the BoE, which underpinned the Pound through the second half of this week.

A surprise revision to the UK’s latest GDP figures helped aid the Pound’s ascent at the end of last week. Growth in the second quarter was revised up from -0.1% to 0.2%, removing the risk of the UK slipping into a recession in the third quarter.

Sterling has managed to maintain this positive trajectory so far this week, although some confusion over when the UK government will publish its medium-term fiscal budget may have capped its recovery.

Upcoming UK jobs data could help buoy the Pound next week, if August’s figures report an acceleration in wage growth.

USD/GBP Exchange Rate: US Dollar Dented by Risk-On Flows

The US Dollar has weakened over the past seven days as an improving market mood limited demand for the safe-haven currency.

USD exchange rates trended broadly lower last week as markets began to calm following the intervention from the BoE.

Market jitters relating to Vladimir Putin’s move to illegally annex occupied territory in Ukraine then offered some respite to the US Dollar on Friday, but the ‘Greenback’ failed to consolidate these gains.

The first half of this week saw this USD selling bias remain in firmly in place, particularly in the wake of the latest ISM manufacturing PMI. After the latest release reported US factory sector activity slowed to a crawl in September.

Looking ahead, the spotlight in the second half of this week is likely to be on the latest US non farm payroll release. Could another robust expansion in US employment growth last month reinforce Federal Reserve rate hike bets and revive USD demand?

EUR/USD Exchange Rate: Euro Fluctuates amid Ukraine Uncertainty

The Euro traded in a wide range at the end of last week as EUR investors were cautious amid renewed Ukraine uncertainty.

Russia’s claims to have annexed four regions in the east of Ukraine raised concerns that Putin could use claims of defending Russian territory as a pretext to escalate the conflict.

This offset the publication of the Eurozone’s latest consumer price index, which reported inflation in the bloc rocketed to a new record high of 10% last month.

The start of this week has seen the Euro gain ground, however. Ukraine’s success in pushing back Russian forces, coupled with a pullback in the US Dollar has made the single currency more attractive to investors.

Upcoming industrial releases from Germany will likely be the immediate focus for EUR investors. With the Euro likely to fall if factory orders and industrial production continued to fall in August.

Matthew Andrews

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