GBP/EUR Exchange Rate Rallies on BoE Rate Hike Bets
The Pound Euro exchange rate trended broadly higher over the past seven days. Sterling strengthened through the second half of last week as it was supported by a bullish market mood, coupled with Bank of England (BoE) interest rate expectations.
After an initial wobble this week, the Pound was quick to resume its bullish trajectory after BoE rate hike bets grew even more hawkish in response to the UK’s latest employment report.
A surprise drop in unemployment, coupled with a stronger-than-expected acceleration in wage growth, led to an uptick in bets the BoE could raise interest rates by up to 50bps this month.
The publication of the UK’s consumer price index will now be in focus ahead of the BoE’s rate decision next week. Another strong inflation reading could compound bets for a larger hike.
GBP/USD Exchange Rate Strikes One-Month High despite Political Hiccup
The Pound US Dollar exchange rate struck a new one-month high this week as Sterling was supported by increasingly aggressive BoE rate hike bets.
The Pound has also been given a leg up by the UK’s latest GDP figures, after April’s month-on-month release reported a solid rebound in domestic economic growth.
However, the uptick in GBP/USD was far from smooth, with the pairing slumping roughly half a cent at the start of this week.
This came as the emergence of fresh UK political uncertainty triggered a bout of GBP profit taking. A weekend of Conservative infighting, following the resignation of Boris Johnson and two of his allies, raised questions over the unity of the Tory party and whether it would be able to hold on to these seats in byelections.
Looking ahead, BoE rate hike bets may continue to underpin the Pound as we head into next week, although there is a risk of a correction if the currency enters overbought conditions.
USD/GBP Exchange Rate Undermined by Fed Rate Pause Expectations
The US Dollar Pound exchange rate slumped over the past week, with USD demand being sapped as weak data reinforced expectations the Federal Reserve will leave its monetary policy untouched this month.
This started in the second half of last week after US jobless claims for the week ending 3 June suddenly jumped to their highest level since October 2021.
USD exchange rates then faced further selling pressure following the publication of the latest US consumer price index, which reported domestic inflation cooled more than expected last month.
The focus now turns to the Fed’s rate decision on Wednesday evening. With the pause largely priced in, any subsequent movement will be determined by the bank’s outlook for future hikes.
If the Fed leaves the door open to more tightening in the future the US Dollar could rally. But if the bank signals that it doesn’t see the need to continue raising rates, USD exchange rates are likely to plunge.
EUR/USD Exchange Rate Firms despite Eurozone Recession
The Euro US Dollar exchange rate firmed over the past week, with the pairing striking its best levels since the end of May.
This comes despite the Euro being infused with some volatility as a result of mixed Eurozone data releases.
The second half of last week saw EUR exchange rates falter after a revision to Eurozone’s latest GDP figures showed the bloc slipped into a recession over the winter.
A better-than-expected German economic sentiment index then lent support to the Euro in the first half of this week, although these gains were tempered ahead of the European Central Bank’s (ECB) upcoming interest rate decision.
The direction of the Euro in the coming days will be dependent on the ECB’s rate decision on Thursday. A 25bps rate hike is widely expected, but there is a level of uncertainty regarding its plans for the second half of 2023. Expect the Euro to strengthen if the bank signals more hikes are to come.