GBP hits 13 month high against USD

Pound Sterling exchange rates maintained a strong tone on Friday, primarily due to the 2-year UK yield reaching fresh 15-year highs above 4.95%. This boost in yields supported the Pound, particularly with ongoing market interest in carry trades.

The Pound to Dollar (GBP/USD) exchange rate reached fresh 13-month highs, slightly below the 1.2850 level. Additionally, the Pound to Euro (GBP/EUR) exchange rate also achieved fresh 9-month highs around 1.1735.

On Monday, GBP/USD experienced a correction and settled around 1.2815, while GBP/EUR remained steady near 1.1720.

This week, the UK calendar is expected to be significant, with the release of the Consumer Price Index (CPI) inflation data and the Bank of England policy meeting. These events can have an impact on the Pound's performance in the currency market.

The uncertainty surrounding this week's Bank of England policy decision has indeed increased. While consensus forecasts indicate an expectation of a further 25 basis-point rate hike, bringing the interest rate to 4.75%, there has been speculation about the possibility of a 50 basis-point hike. This speculation has arisen due to recent inflation data, which may have raised concerns about the need for a more significant rate increase.

However, alongside the inflation concerns, there has also been a rise in political pressure for a pause in rate hikes. This pressure has been driven by the surge in mortgage rates, which could have potential implications for the housing market and affordability for homeowners.

Given these factors, the Bank of England faces a challenging decision, and the market is uncertain about the magnitude of the rate hike or whether there might be a pause in the tightening cycle. The outcome of the Bank of England policy meeting will likely have an impact on the Pound Sterling and market sentiment.

USD

On Friday, the US dollar experienced a dip, reaching fresh 1-month lows, as the currency index slid to around 101.50. However, on Monday, there was a limited recovery, with the dollar rising to 101.90 as it attempted to regain some strength amid a loss of traction in equities.

Scotiabank expects a fragile underlying tone for the dollar. They note that while the Dollar Index (DXY) has stabilized, there are no clear indications of a turnaround in losses, and the overall outlook for the dollar remains soft. Market participants are contemplating whether the Federal Reserve (Fed) can or will fully deliver on the implied interest rate hikes as reflected in this week's dot plot.

According to Scotiabank, the peak of the Fed's policy cycle is likely to have a negative impact on the US dollar. This could lead to a positive response in risk assets, and investors may be inclined to move capital away from the relative safety of the dollar and towards riskier, higher-yielding assets in anticipation of a relaxation in monetary policy.

Market participants will closely monitor the rhetoric from the Fed, with Fed Chair Jerome Powell scheduled to testify before Congress this week. Unicredit anticipates that Powell will reiterate the notion that the pause in June is not a complete halt but rather a moderation in the pace of interest rate hikes.

In terms of GBP/USD, UoB (University of Birmingham) sees potential for the pair to target 1.2900. However, they also mention that a breach of the 1.2700 level, which was considered strong support, would indicate that the strength of the British pound has come to an end.

EUR

Last week, the Pound Euro (GBP/EUR) exchange rate experienced significant volatility driven by central bank dynamics. The Euro initially strengthened on Monday as investors anticipated a 25 basis-point rate hike from the European Central Bank (ECB) later in the week.

The Euro was further supported by an unexpected improvement in German economic sentiment on Tuesday and its negative correlation with the weakening US Dollar (USD). However, despite these factors, the Euro couldn't halt its losses against the rallying Pound.

On Wednesday, the Euro initially softened but managed to recover its losses. Better-than-expected industrial production data and the ongoing weakness of the US Dollar provided support for the single currency.

The ECB decision on Thursday provided a boost to the Euro. As expected, the central bank raised rates, and it also hinted at further rate hikes in the future. The ECB revised up its core inflation forecasts, and President Christine Lagarde stated that a rate hike in July was highly likely and that the bank was not considering a pause.

However, at the end of the week, the Euro's gains were tempered by the Eurozone's final consumer price index data, which confirmed a sharp slowdown in inflation in the region the previous month.

Overall, the Pound Euro exchange rate experienced wide-ranging movements, reaching a nine-month high during the week. The dynamics of central banks, particularly the ECB, played a significant role in driving volatility in the currency pairing.

The upcoming Eurozone releases include consumer confidence data on Thursday and the Purchasing Managers' Index (PMI) figures for manufacturing and services on Friday.

The consumer confidence data is expected to indicate that morale remains low in the Eurozone. If the reading confirms this expectation, it could potentially lead to a softening of the Euro (EUR) as market participants may interpret it as a sign of weaker economic sentiment.

On Friday, the Eurozone PMIs for manufacturing and services are anticipated to show deteriorating activity in both sectors. A decline in these indicators could weigh on the Euro towards the end of the week, as it suggests a slowdown in economic activity within the Eurozone.

Overall, these upcoming releases have the potential to impact the Euro's performance. If the consumer confidence data and PMI figures confirm the anticipated negative trends, it could put downward pressure on the Euro as market sentiment adjusts to the weakening economic conditions in the Eurozone.

Data for the week ahead -

Monday

11.00 EUR ECB’s Lane Speech

Tuesday

01.15 CNY PBoc Interest rate decision

01.30 AUD RBA Meeting Minutes

23.50 JPY BoJ Monetary Policy Meeting Minutes

Wednesday

06.00 GBP Consumer Price Index

12.30 CAD Retail Sales

14.00 USD Fed’s Chair Powell testifies

Thursday

07.30 CHF SNB Interest rate decision

08.00 CHF SNB Press Conference

11.00 GBP Bank of England interest rate decision

14.00 USD Fed’s Chair Powell testifies

Friday

07.30 EUR German HCOB PMI

08.30 GBP S&P Global/CIPS Services PMI

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