Pound surges as BoE officials cast doubt on August rate cut
The pound (GBP) started last week strong as investors responded positively to the new Labour government’s first full day in office, as Chancellor Rachel Reeves began outlining plans for growth.
This upside was reinforced by hawkish comments from outgoing Bank of England (BoE) policymaker Jonathan Haskel, who said he would ‘rather hold [interest] rates’ than cut them at the bank’s August policy decision.
BoE Chief Economist Huw Pill echoed Haskel later in the week, saying that ‘uncomfortable strength’ in British wage growth meant it was an ‘open question’ whether the bank was ready to cut rates. The odds for an August rate cut fell from 62% to just 50%, which boosted Sterling’s appeal.
Finally, a larger-than-expected rebound in UK GDP growth lifted the pound even higher on Thursday. The British economy expanded 0.4% in May, above expectations of 0.2%. GBP struck a 23-month high against the euro (EUR) and a one-year high against the US dollar (USD).
This week, we could see Sterling trim its gains amid a flurry of high-impact releases. The latest consumer price index could reignite bets on an August rate cut, if it shows that price pressures are easing. Meanwhile, an expected cooling of wage growth in May and forecast fall in retail sales in June could put pressure on GBP.
US dollar undermined by Fed rate cut bets
After a wobbly start to the week, the US dollar then enjoyed support following comments from Federal Reserve Chair Jerome Powell. Powell said the bank wanted more evidence that inflation was easing before cutting interest rates and warned against loosening monetary policy too soon.
However, the upside proved short-lived. The US CPI for June came in cooler than expected, with headline inflation easing from 3.3% to 3% – its lowest level in a year.
An unexpected decline in US consumer sentiment and consumer inflation expectations reinforced the USD selling bias on Friday. The odds of a Fed rate cut in September rose from 71% to 90%, with the dollar hitting multi-month lows.
The attempted assassination of Presidential hopeful Donald Trump infused USD with some volatility at the start of this week’s session, although the ‘greenback’ has already surrendered its initial gains.
Another speech from Powell this evening could drive more volatility. Will he double down on last week’s comments and boost the dollar? Or could he strike a more dovish tone following the inflation report, thereby putting pressure on USD?
The latest US retail sales data could also impact the ‘greenback’ this week. An expected stalling of sales growth could dampen the currency’s appeal.
Euro uncertain in absence of data
The euro had a comparatively quiet session last week as a notable lack of market-moving Eurozone data kept the currency subdued.
Ongoing political uncertainty in France – the Eurozone’s second-largest economy – put some pressure on EUR exchange rates, as a hung parliament with deep ideological divisions could struggle to govern the country.
The single currency was, however, cushioned by its strong negative correlation with the US dollar.
Ultimately, the euro faced mixed trade, striking a 23-month low against GBP and a five-week high against USD.
The session ahead could see clearer movement in EUR exchange rates as the European Central Bank (ECB) will announce its latest interest rate decision on Thursday. With no policy change expected, the focus is on the bank’s forward guidance. Could any signals that more rate cuts are likely in the second half of 2024 see the euro slide?
Before then, Germany’s latest ZEW economic sentiment index could impact the common currency. If morale in the Eurozone’s largest economy deteriorated this month, as expected, then EUR could face selling pressure.