Pound Pushed Higher by Bets on 25bps BoE Hike, US Dollar Drops despite Sticky Core Inflation

  • Pound pushed higher by BoE rate hike bets.

  • Euro strengthened by hawkish ECB rhetoric.

  • US Dollar declines as inflation data underwhelms.

  • Markets await Fed and ECB interest rate decisions.

GBP/EUR Exchange Rate: Pound Bolstered by BoE Bets

The Pound Euro (GBP/EUR) exchange rate gained ground over the past seven days. The Pound (GBP) found support from market bets on a 25bps interest rate hike from the Bank of England (BoE).

Enthusiasm in Sterling was dampened on Thursday following criticism of the UK’s attractiveness to foreign businesses. The UK’s investment landscape came under fire from Microsoft after the company’s merger with Activision-Blizzard was blocked by the Competition and Markets Authority (CMA).

Sterling found regained strength on Friday amid an upbeat market mood. However, any gains for the currency were capped over the past week by news of further industrial action. Unions for rail drivers and health workers announced fresh strikes over the coming weeks.

BoE rate hike bets could continue to bolster the Pound in the coming week. Domestic headwinds may also drive movement in GBP, with the UK local elections potentially prompting some political jitters.

GBP/USD Exchange Rate: Sterling Pressured by Manufacturing Sector Downturn

The Pound US Dollar (GBP/USD) exchange rate rose over the past week. Positive retail sales figures initially lent support to the Pound (GBP) on Wednesday. The Confederation of British Industry’s (CBI) distributive trades figures for April rose to an above-forecast reading of 5.

Thin trading conditions and a sparse data calendar prompted limited movement in GBP over much of the week, though it surged higher against a tumbling US Dollar (USD) on Friday.

Sterling came under pressure on Tuesday after the final reading of April’s manufacturing sector PMI, however. The PMI showed that factory output and orders fell to a three-month low of 47.8. The survey also pointed to easing inflationary pressures, which dented BoE rate hike bets and enthusiasm for the Pound.

GBP could see a boost on Thursday if the final services PMI confirms a 12-month high reading for the UK’s dominant private sector. Market sentiment could also support the riskier UK currency; will an upbeat mood lift GBP/USD?

USD/GBP Exchange Rate: USD Slumps ahead of Fed Decision

The US Dollar Pound (USD/GBP) exchange rate dropped over the past week. The US Dollar came under pressure on Wednesday as markets pared back bets on further action from the Federal Reserve. A sharp recovery in durable goods orders helped to limit losses for USD, though.

USD saw some volatile movements on Thursday. The currency initially strengthened as markets renewed their Fed rate hike bets. Worse-than-expected GDP growth data pulled the US dollar lower, but evidence of underlying inflationary pressures cushioned the currency’s losses.

The US Dollar slumped on Friday as the headline reading of the PCE price index declined. Despite evidence of stickier core inflation, the data disappointed traders who had been anticipating hotter figures. USD managed to regain some lost ground on Monday as the ‘Greenback’ benefitted from a risk-off mood.

The Fed’s interest rate decision will be the key focus for USD investors later today. If the central bank leaves the door open for further hikes, then the currency could climb; a pause in the Fed’s hiking cycle could see USD slump. The US Dollar could suffer further losses on Friday if non-farm payrolls fall as forecast.

EUR/USD Exchange Rate: EUR Finds Support from ECB Rate Hike Bets

The Euro US Dollar (EUR/USD) exchange rate gained over the past week. The Euro (EUR) was bolstered by European Central Bank (ECB) rate hike bets over the past seven days. ECB policymakers continued to set out their hawkish stance. A 13-month high reading in Germany’s consumer confidence also bolstered EUR on Wednesday.

EUR came under pressure later in the week after disappointing growth data for Germany and the Eurozone. The single currency found some strength from expectations that Germany would narrowly avoid a 2023 recession, though.

An unexpected drop in core inflation pulled the Euro lower on Tuesday. The data prompted a pullback in bets on more aggressive policy tightening from the ECB later this week.

The ECB’s interest rate decision on Thursday will be the core focus for EUR investors over the coming week. A larger-than-expected hike could bolster the single currency.

Gareth Monk

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