Published: 19/06/2023 By ECAPThe British Pounds has risen to fresh multi-month highs but the coming week could result in a setback if inflation data surprises either higher or lower and the Bank of England strikes a cautious tone on Thursday. In fact, the Pound reached its strongest level against the Euro and the U.S. Dollar since August 2022 and April 2022, respectively. On that note, the British Pound has been boosted by rising short-term UK bond yields which in turn reflect the expectations for further BoE rate hikes, owing to the UK’s “sticky inflation”. However, the immediate risk to the Pound lies with the CPI inflation report due on Wednesday. Ultimately, a downside miss could see the Bank of England’s rate hike expectations deflate, which would prompt an unwind in GBP strength.
EUR: The Euro has rebounded against the U.S. Dollar but continues to soften against the British Pound as ECB and BoE policies diverge. Nevertheless, the Euro could attempt to recoup some of the recent losses against its peers thanks to the European Central Bank’s hawkish hike, oversold conditions, and a spate of underwhelming macro data. In fact, ECB President Christine Lagarde’s remarks last week that the central bank still has ground to cover indicates the ECB is in no mood to pause just yet, aiding the bloc’s single currency. Moreover, Euro area macro data has underwhelmed in recent weeks, as reflected in the eurozone Economic Surprise Index. However, the series seems to be mean reverting, suggesting the bar for further downside surprise in the bloc appears to be low. Ultimately, better than expected macro data could support the singe currency.
USD: The U.S. Dollar stabilised in thin holiday-affected trade this morning, as traders digest the impact of last week’s central bank decisions, with a speech by Fed Chair Jerome Powell looming large. In fact, the U.S. Dollar Index is showing a sideways performance as market participants are mixed about the policy rate guidance by the Fed. Last week, Fed chair Jerome Powell allowed interest rate to remain steady but delivered hawkish guidance citing two small interest rate hikes would be appropriate. However, considering the US economic outlook, and softening US consumer inflation expectations, market participants believe that the Fed might announce only one rate hike this year, as per the CME Fed-watch tool. Moreover, U.S. labour market conditions have softened sharply as firms are facing pressure from higher interest rate and right credit conditions by US regional banks.