Published: 09/05/2023 By ECAPSterling rallied against a basket of currencies yesterday, marking a year-to-date high against the US Dollar as well as marking a 6-month high against the Euro after breaking out of a long held range. The move comes amidst an ongoing outperformance of the pound, which is 2023's best-performing major currency, owing to an improved UK economic outlook and falling gas prices. The Bank of England meanwhile remains in a data-dependent mode which has ensured markets see up to three more interest rate hikes coming from the Bank before September. This has supported sterling until now but also leaves it at risk of declining if the Bank of England pushes back against these expectations on Thursday.
The European shared currency was weighed down by the dismal eurozone data released yesterday. German Industrial Production plunged -3.4% MoM in March compared to the -1.3% contraction expected. The Eurozone Sentix Investor Confidence index deteriorated more than expected, to -13.1 in May from -8.7 booked the previous month. Moreover, the Current Situation Index fell to -9.0 from -2.3 in April, while the Expectations Index dropped to -19.0 in May, or its lowest level since December 2022. Ultimately, the data revived recession worries and overshadowed hawkish comments by members the European Central Bank.
The US Dollar found some ground following the overnight sharp rise in the US Treasury bond yields, bolstered by the optimism that the US banking sector is not headed for a wider crisis. However, any meaningful upside for the greenback seems to be capped as markets have also started pricing in the possibility that the Fed will begin cutting rates in the second half of this year. Moreover, market participants seem reluctant to place aggressive bets as they wait for tomorrow’s release of the latest US consumer inflation figures. The crucial US CPI report will influence market expectations about the Fed's next policy move, driving the USD demand and providing a fresh directional impetus.