GBP Struggles Amid Middle East Tensions, Focus Shifts to ECB and Fed Rate Moves
GBP
The Pound Sterling started the week on the back foot, weakening against its major peers as market sentiment took a hit. At the time of writing, GBP|USD and GBP|EUR are trading at 1.3098 and 1.1913, respectively.
Growing tensions in the Middle East, particularly between Iran and Israel, have sparked concerns. Over the weekend, Israel escalated strikes on Beirut following Prime Minister Netanyahu’s pledge to intensify military action.
The conflict has amplified fears of disruptions to oil supply chains, driving energy prices higher. This adds pressure on oil-importing economies like the UK, potentially increasing foreign capital outflows.
Adding to the uncertainty, speculation is building that the Bank of England may cut interest rates again in November. Comments from BoE Governor Andrew Bailey last week hinted that the central bank could take a more aggressive stance on rate cuts if inflation continues to ease.
However, BoE Chief Economist Huw Pill took a more cautious approach in his speech on Friday, warning against cutting rates too quickly or too deeply, even as further cuts remain on the table.
Looking ahead, the key focus for the Pound this week will be Friday’s release of the August GDP and factory data, which could provide fresh direction for the currency.
EUR
Markets are almost fully pricing in a 25 basis point rate cut from the European Central Bank next week. The ECB has already factored in weaker growth and inflation below 2% in its latest forecasts. While Isabel Schnabel’s recent speech highlighted downside risks to growth, she also noted that monetary policy might have limited impact in addressing those risks.
At the same time, data from individual countries continues to show stubbornly high services inflation, and the recent surge in oil prices could lead to upward revisions in inflation forecasts when the ECB updates its projections.
Although markets are aware of these risks, they are also leaning on dovish comments from ECB members like Villeroy and banking on a potential rate cut being fully priced in by the meeting day. Isabel Schnabel is set to chair an ECB meeting today, and any shift in her stance towards a more hawkish tone could push EUR|USD back above 1.10. However, with the wide gap between US and Eurozone rates, there could still be downward pressure on EUR/USD in the short term.
USD
The US Dollar Index extended its winning streak into a sixth consecutive day on Monday, hovering near 102.50.
September’s labour market report painted a picture of economic resilience, with payrolls jumping by 254K – the highest figure since March – and the unemployment rate ticking down to 4.1%. Wage growth also remained solid, with Average Hourly Earnings up 4% year-over-year, fuelling consumer spending.
The robust jobs data has shifted market expectations, wiping out any chance of a larger 50 basis point rate cut by the Federal Reserve in November. According to the CME FedWatch tool, traders now widely expect a smaller 25 bps cut.
On Friday, Chicago Fed President Austan Goolsbee hailed the employment report as “superb,” stating that if similar reports follow, confidence in achieving full employment would grow.
Looking ahead, all eyes are on Thursday’s release of September’s Consumer Price Index (CPI) data, which will offer further insight into the Fed’s next move on interest rates.
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