Sterling Under Pressure, Eurozone Awaits Key Data, US Dollar Reacts to Fed Signals
GBP
Sterling faced rejection once again at the $1.28 level against the US Dollar but is still holding strong above €1.18 against the Euro. Last week investors were seeing less than a 50% chance of an interest rate hike in August. This, combined with the European Central Bank cutting rates last week, pushed the Pound to €1.19, its highest level against the Euro in 22 months.
However, the Pound is now feeling the pressure as investors cash out and take some money off the table before this week’s key inflation data and the Bank of England’s interest rate decision. Currently, GBP|USD has dropped to $1.2675 and GBP|EUR to €1.1833 (at the time of writing).
As we learnt from Brexit, we know political events have a big impact on Sterling. Opinion in the polls over the weekend show the UK Labour Party with a large lead ahead of the July 4 general election. Some Conservatives warn that Labour might win a huge majority (supermajority), similar to a recent political shift in Mexico that impacted their markets. Interestingly, the UK’s risk of default (measured by Credit Default Swaps) increased last week, but so did Germany’s, likely due to issues in France. Markets are currently seeing a Labor win a positive and we could see more Sterling strength as we get closer to the election date, should Labor continue to dominate the polls.
This week, the Bank of England will be the main focus. On Wednesday, we’re expecting May’s services inflation to drop significantly. Then on Thursday, all eyes will be on the Bank of England, who might hint at a possible rate cut in August. If this is the case, this double header of negative news will more than likely lead to a Sterling sell-off.
EUR
Investors are still worried about the risks surrounding the French elections, though reports from the European Central Bank suggest there’s no panic in Frankfurt. Tonight’s EU leaders’ meeting will be important as they decide who gets the top jobs in Brussels. It’s expected that Ursula von der Leyen will secure a second term as President of the European Commission after her party’s recent success in the EU parliamentary elections.
This week, the most important data for the Eurozone will be the release of June’s preliminary PMI numbers on Friday. These numbers give an early indication of economic activity. Markets expect to see some slight improvement, although the manufacturing sector is still struggling. There is a lack of any other significant data releases out of the Eurozone this week.
USD
Recent US inflation data came in lower than expected, which increased hopes that the Federal Reserve might cut interest rates this year. This softer inflation news caused the US Dollar to drop and US Treasury bond yields to fall, pushing GBP|USD to a three-month high of 1.2861 last week.
However, this spike didn’t last long. Sellers quickly stepped in after the Fed’s policy announcements. The Fed kept interest rates steady at 5.25%-5.50% during their June meeting. The updated economic projections indicated that the Fed expects only one rate cut in 2024, a change from the three cuts predicted in March.
The Fed’s hint at only one rate cut this year continued to boost the US Dollar, putting more pressure on the Pound. By Friday, GBP|USD had fallen to below 1.2700. Markets are now seeing about a 58% chance of a 0.25% rate cut by the Fed in September, up from 47% a week ago, according to CME Group’s FedWatch tool.
Looking at the data calendar this week out of the US, we have retail sales due tomorrow and PMI data due Friday.
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