Published: 25/04/2023 By ECAPSterling has struggled to find a clear direction this week in the absence of domestic economic data. Nevertheless, expectations of further interest rate hikes are now more likely according to analysts, as food price inflation in the UK has climbed to the highest levels in 45-years, and another rate hike at the Bank of England’s next meeting (May 11th) is expected. Looking forward, as previously mentioned, economic data due out of the UK this week is very light, therefore, many analysts are expecting the GDP data releases out of the Eurozone and the US towards the end of the week to potentially influence sterling, depending on whether the releases meet market expectations or not.
The Euro continues to muster strength following yesterday’s release of the Ifo institute’s business climate index. German business morale rose slightly in April, adding to hopes that Europe's largest economy has managed to have dodged a winter recession. Looking forward, April inflation reports from the region’s largest economies Germany, France, and Spain are likely to point to inflationary pressures remaining elevated. On that note, European Central Bank board member Isabel Schnabel told Politico that a 50-basis point rate hike was not off the table and would depend on data – notably inflation figures due two days before May's meeting. Ultimately, futures pricing implies about a 2/3 chance of a 25-basis point hike and a 1/3 chance of a larger 50-basis point hike.
The US dollar was on the back foot in early European trade this morning, with traders positioning for a more hawkish stance from the European Central Bank than the Federal Reserve ahead of next week’s policy-setting meetings. The dollar index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 101.07, close to a new 10-day low after falling 0.4% overnight. Ultimately, the US Federal Reserve is widely expected to raise rates by another 25-basis points at next week's policy-setting meeting, but expectations are growing that the central bank will start cutting interest rates later this year.