Sterling had been volatile anticipating the Bank of England’s rate hike decision last Thursday, with investors and speculators trying to guess the outcome. The BoE voted for another 0.25% increase in interest rates. This coupled with July’s negative PMI data, along with negative UK house price data sent the Pound falling against most of its G10 peers.
Sterling’s weakness was somewhat short lived as BoE Governor Andrew Bailey made some hawkish comments, implying that interest rates will be higher for longer, in order to combat inflation issues. It is also likely that we will see one last rate hike from the BoE in September with the markets currently pricing in a 0.25% increase, with potential for an increase in November looking unlikely. However, should UK inflation data fail to show some positive signs, we could see the market shift and a November raise become more likely.
With the consensus being that all the major central banks are now coming to the end of their rate hiking cycles, it is becoming more of a question of who is going to be the first to cut interest rates rather than who is going to raise them. With the BoE implying that interest rates won’t be cut any time soon along with potential further rate raises, Sterling had been boosted and regained its losses against both Euro and Dollar.
The UK is pretty light on the data front this week with the only meaningful piece being GDP (Gross Domestic Product) which is released on Friday. At current the consensus vs previous figures is little unchanged. Any more than a 0.1% increase will lead to the Pound strengthening and vice versa.
Despite downbeat data coming out of the Eurozone last week, the Euro strengthened against most of its peers, largely due to the dovish interest rate decision from the BoE, coupled with inflation data in the Eurozone having fallen to its lowest level since January 2022.
With inflation finally falling in the Eurozone, it is clear that the ECB’s policy is now working, which is going to reduce the likelihood of any further rate hikes.
The BoE interest rate decision was the main driver pushing GBP|USD into the 1.26’s on Thursday. However, on Friday US Nonfarm payrolls were printed below expectations, weakening the Dollar and pushing GBP|USD back above 1.27.Even though the Dollar is somewhat of a safe haven currency, Fitch downgrading the US Government’s top credit rating from AAA+ to AA+ has put the Dollar under a lot of pressure recently. With negative data releases coming out of the US and a “steady deterioration in standards of governance” we could see the Dollar fall against its peers.
On the data front for the US, inflation figures are released Thursday. The US seems to have a handle on inflation and figures are expected to decrease slightly displaying how their tight monetary policy is finally working.
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