Published: 27/06/2023 By ECAPSterling gave back early small gains against the US Dollar and Euro yesterday as traders continued to grapple with the implications of the previous week's outsized rate hike by the Bank of England. Last week’s larger than expected hike pushed market pricing for the peak in Britain’s key interest rate over 6%. That implies further tightening of mar than 100-basis points. Ultimately, market participants are trying to assess whether this should mean a stronger pound, with currencies typically benefiting from higher rates compared to peers, or whether the ramifications for economic growth in Britain mean the pound will weaken.
The Euro held its ground against a basket of currencies ahead of speeches by European Central Bank officials at the bank's Forum on Central Banking in Sintra, Portugal, including President Christine Lagarde. However, the latest economic surveys have painted a worsening picture for Germany, the eurozone’s largest economy, with yesterday’s Ifo business climate index the latest to show German business morale worsening. Nevertheless, ECB policymaker Martins Kazaks pointed to further interest rate hikes after its next meeting as inflation remains too high.
The US Dollar weakened in early European trade this morning, but losses were minor as tensions in Russia remained fraught while traders await the release of economic data that may determine the timing of future Federal Reserve interest rate hikes. Aside from the events in Russia, sentiment remains pressured by worries over inflation and the potential for central banks, and the Federal Reserve in particular, to keep interest rates "higher for longer". Ultimately, the Federal Reserve's preferred inflation gauge, the core PCE index, is due on Friday, and could be an important data input as the Fed heads into its next policy meeting in July.