Global Central Bank Speculation Will Drive Pound Sterling Vs Euro, Dollar Moves

20.07.23: Global Central Bank Speculation Will Drive Sterling and Euro Moves Against the Dollar

There is optimism that the global rate cycle is coming to a peak and this will be very important for market sentiment.

Although there are strong expectations that the Federal Reserve and ECB will increase interest rates at next week’s policy meeting, there is increased optimism that these will be the last rate hikes.

Hopes of peak rates will tend to underpin risk appetite in global markets which will also tend to curb dollar demand in global markets.

The medium-term expectations for all major banks will be very important in driving currencies in the near term.

Given that the rate hikes have been very rapid in the current cycle, there will still be concerns that there are major stresses in the financial sector which will suddenly erupt into a major risk event with financial or corporate casualties.

Markets are also moving into the US and European holiday period with a sharp decline in trading volumes and lack of liquidity.

in these circumstances, there will be the risk of higher market volatility and a more substantial impact from risk events.

Pound US Dollar Exchange Rate Outlook

The Pound was subjected to further sharp selling after the weaker-than-expected UK inflation data.

There was a notable shift in Bank of England interest rate expectations with markets now considering that rates would peak at 5.75% rather than 6.0% ahead of the data.

UK yields also declined sharply on the day and the Pound to Dollar (GBP/USD) exchange rate slumped to lows at 1.2870.

Bank of England deputy Governor Ramsden stated that inflation is still much too high and if there is evidence of persistent inflation pressures then further monetary policy tightening would be required. He added that energy prices had fallen more than expected while other elements remain elevated.

The hawkish rhetoric provided some Sterling support and there are still expectations that the BoE will be the last major central bank to stop rate hikes.

With the dollar overall still struggling, GBP/USD recovered to 1.2920 on Thursday.

Nevertheless, any draining of yield support would undermine the Pound.

Global risk conditions will also remain important for the UK currency with Pound support if global equities make headway which will underpin the currency.

Political developments will be monitored with three by-elections on Thursday.

The Conservative Party is defending all the seats and there is a high risk that they will lose all three which will increase pressure on Prime Minister Sunak, although financial developments will dominate.

Overall, GBP/USD is likely to be blocked below 1.3000 unless the US data is very weak with a potential test of the important 1.2850 support area.

Euro (EUR) Exchange Rates Today

The Euro was unable to make headway on Wednesday and the Euro to Dollar (EUR/USD) exchange rate dipped to lows near 1.1170 before a tentative recovery to 1.1200 and traded around 1.1210 on Thursday.

ECB council member Stournas stated that inflation is falling and more tightening could hurt the economy.

There were further doubts whether the ECB tightening cycle would extend beyond July which hampered the Euro.

Stronger risk conditions will tend to underpin the Euro and the single currency will also gain net support from Chinese moves to boost the yuan.

There will, however, be reservations over the Chinese and Euro-Zone economic outlook.

According to Socgen, growth expectations will be an important element. It notes; “US economists have continued to push up their forecasts for 2023 GDP growth, as has happened in the majority of G7 economies. The exception is the eurozone, where 2023 consensus growth has slipped marginally this month. It’s hard to see how the Euro can go on rising at the recent pace of growth expectations fall further.”

The bank adds; “A push to a 1.15-1.20 EUR/USD range probably requires two things – an improvement in expectations about Eurozone GDP growth and a stronger belief that the ECB will continue hiking rates after the Fed has finished.”

Overall, EUR/USD will need weak US data to make much headway in the near term.

US Dollar (USD) Exchange Rates Outlook

There were no major US developments on Wednesday with the dollar gaining support from weakness in other major currencies.

There were still very strong expectations that the Federal Reserve would increase interest rates next week and that this would be the last rate hike.

The dollar was unable to hold intra-day highs as expectations of peak interest rates sapped potential support.

The Chinese central bank moved to defend the yuan on Thursday by fixing the currency much stronger than expected in an effort to reverse yuan losses.

Gains in global equities would tend to undermine the dollar, but equity futures were lower on Thursday.

Overall, dollar selling is still likely to be limited ahead of next week’s Fed policy decision unless the US data is extremely weak or the central bank leaks that rates will not be increased next week.

Other Currencies

The latest Australian labour-market data was stronger than expected with an employment increase of 32,600 for June compared with expectations of around 15,000 and the unemployment rate held at 3.5%.

The Australian dollar was also boosted by the stronger Chinese yuan.

The Pound to Australian dollar (GBP/AUD) exchange rate dipped sharply to 4-week lows below 1.8950.

The Pound to New Zealand dollar (GBP/NZD) exchange rate also retreated to below 2.0550.

The Pound to Canadian dollar (GBP/CAD) exchange rate dipped to week lows at 1.6950 before a recovery to 1.7000.

The Swiss franc maintained a strong tone in global markets amid long-term confidence in Swiss fundamentals.

The Pound to Swiss franc (GBP/CHF) exchange rate dipped sharply to 12-week lows just above 1.1060.

The Pound to yen (GBP/JPY) exchange rate dipped to lows at 179.80 before a recovery to 180.30.

The Day Ahead

The US will release the latest data on jobless claims and also the latest Philly Fed survey.

The data will give further insights into the US economic conditions and will have an important impact if both releases are much weaker than expected.

Consensus forecasts are for jobless claims of 240,000 and a Philly Fed reading of –10.

The Federal Reserve will remain in the blackout period ahead of next week’s policy decision, but markets will be wary over any leak through the Wall Street Journal.

Overall moves in equity markets and risk conditions will remain an important influence.

Overnight, Japan will release its latest inflation data which could be important ahead of next week’s Bank of Japan policy decision.