Heads Turn to BoE and Fed Rate Hike Decisions
GBP
Pound Sterling had a turbulent end to the previous week, witnessing a notable decline against the Euro and Dollar. GBP|EUR saw lows of 1.1580 and GBP|USD to 1.2370 marking it lowest in a 3-month period. This was driven by the ECB hiking interest rates, strong data out of the US and a weak overall outlook of the UK’s economy. This week, the Pound faces another critical period with inflation figures and the Bank of England’s interest rate decision on the horizon.
The Pound to Euro exchange rate may continue to face selling pressure this week as investors take a defensive stance towards the UK currency. If Wednesday’s inflation data and Thursday’s Bank of England decision go against the Pound, we could see further testing of lows towards 1.1540.
It’s worth noting that the Pound has been locked in a well-established summer range, and any significant deviation from this range would require a substantial shift in the economic narrative for either the UK or Eurozone. Both the European Central Bank and the Bank of England are showing signs of pausing their rate hikes, making it challenging to envision a breakthrough from this range.
While the Bank of England is expected to raise interest rates by 25 basis points, signalling a commitment to further rate hikes if warranted, markets are increasingly considering the possibility of a pause in the rate-hiking cycle after September. Such guidance could put downward pressure on the Pound.
UK inflation data, set to be released on Wednesday, is a crucial factor to watch. The market expects a headline CPI rate of 7.0% year-on-year and a core CPI rate of 6.6% year-on-year. A beat in these figures could support the Pound, but in the current environment, an excessively strong inflation reading could signal stagflation concerns, which may not be favourable.
The big interest rate decision from BoE will be released Thursday. Markets are currently pricing in a 0.25% hike, however it’s unlikely the vote will be unanimous considering the different stances members of BoE have been taking.
EUR
The ECB implemented a 25 basis points increase in interest rates, affecting all areas of their policy. However, the central bank has given indications that these rates might not see further adjustments in the near future. This forward guidance led to a sell-off of the Euro in response to the ECB’s Quarterly Staff Forecasts. As a result, market sentiment suggests that the single currency is likely to face ongoing downward pressure in the weeks ahead.
Investors will closely monitor PMI figures scheduled for release on Friday. Apart from this there’s not much meaningful data out of the Eurozone this week and so eyes will be on interest rate decisions from the UK and US.
USD
The upcoming week holds a significant event for the US Dollar as the Fed is scheduled to announce its latest interest rate decision. Current market sentiment is strongly leaning towards the expectation that the Fed will maintain interest rates at the current level of 5.50%. This consensus is well-reflected in market pricing, with only a mere 3% probability of a rate hike being factored in. Remarkably, there has been minimal dissent within the Federal Reserve regarding this pricing, indicating a broad consensus on keeping rates steady.
The prevailing sentiment in the market also suggests that the Fed may maintain a hawkish policy stance. This perception is driven, in part, by concerns over inflation trends in the United States. The recent strength of the US Dollar, has been influenced by a combination of factors, including a weak Euro and stronger-than-anticipated US economic data. This uptrend in the US Dollar has given the Fed some flexibility in its monetary policy, potentially allowing room for rate hikes should economic conditions require them.
As the Federal Reserve’s decision approaches, market participants will closely monitor the central bank’s policy statement and any hints it provides about its future stance, which could have a significant impact on the Dollar’s trajectory.
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