Pound Gains as BoE Eyes Cautious Easing; Euro Stagnates Amid Weak Data; Dollar Under Pressure Ahead of Key Fed Decision
GBP
The Pound showed strength against its major peers during this morning’s session, driven by expectations that the Bank of England will slow its policy-easing cycle compared to other central banks.
Despite a noticeable slowdown in UK services inflation (a key indicator closely watched by BoE policymakers) the reduction hasn’t been sufficient to trigger aggressive interest rate cuts. Services inflation eased to 5.2% in July from 5.7% in June. While this easing does open the door to potential rate cuts, markets currently see only a 37% chance of such action, according to Reuters.
All eyes will be on BoE Governor Andrew Bailey’s speech at the Jackson Hole Symposium on Friday, where investors hope to gain insight into the future interest-rate path. Key topics include his outlook on wage growth and the potential for inflationary pressures to rise again.
Ahead of Bailey’s remarks, the UK’s preliminary S&P PMI data for August, set to be released on Thursday, will be another focal point. Economists expect the Manufacturing PMI to hold steady at 52.1, with Services PMI anticipated to improve slightly to 52.8 from 52.5 in the previous month.
GBP|USD hit a fresh monthly high at the key 1.30 level this morning, as speculation grows that the Federal Reserve will begin cutting rates as early as September, weakening the Dollar.
In contrast, the Pound remains slightly undervalued against the Euro, according to consensus forecasts from top investment banks. Predictions suggest the GBP|EUR exchange rate could end Q3 higher than current levels, with an average estimate now around 0.75% above where it stands today. The Pound had fallen 2.30% from peak to trough earlier this month following the BoE’s interest rate cut, which led investors to reduce their long positions in the currency. However, a recent technical correction has stabilised the market, and the Pound has recovered about half of its earlier losses, currently trading around 1.1730 against the Euro, at the time of writing.
EUR
The Euro remained subdued on Monday due to a lack of fresh data from the Eurozone, leaving investors to digest last week’s disappointing sentiment index and industrial production figures.
Industrial output across the Eurozone declined in June, with Germany (Eurozone’s largest economy) being particularly affected by the ongoing slump in manufacturing. The energy shock from Russia’s war in Ukraine continues to weigh heavily on the region’s industrial recovery.
Euro investors had hoped for a weaker US Dollar to lift the Euro, but the Dollar’s performance, while under pressure, wasn’t weak enough to provide significant support.
Looking ahead, the release of PMI data could influence exchange rates. While manufacturing activity in August is expected to have declined as forecast, the German service sector is likely to show some improvement.
Positive news here could boost Euro sentiment, but movements in the Euro might ultimately be driven by US Dollar dynamics, especially following the release of the Federal Open Market Committee (FOMC) minutes.
USD
The US Dollar has dropped to its lowest levels this year, losing over 2% since its August peak and around 4% since early July. This decline is mainly due to growing expectations that the Federal Reserve will start cutting interest rates in September.
Earlier this year, the focus was on how lower inflation could lead to a return to normal monetary policy. However, the recent shift in sentiment suggests that the Fed might cut rates to prevent a potential recession.
There’s now a 60% chance that the Fed will cut rates by at least 100 basis points by the end of the year, with one of those cuts likely to be 50 basis points. This is a big change from July when the odds of such cuts were just 1.5%.
Fed Chair Jerome Powell could still boost the Dollar at the upcoming Jackson Hole symposium, but if he signals a more cautious approach, the Dollar might weaken further.
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