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The USD has received a fresh bout of demand as a second Trump presidency continues to sink in with the market.

The expectations are that Trump will double down on his hardline tariff proposals and suggested expansionary policies. This may lead to higher inflation and therefore prevent the Federal Reserve from cutting rates more aggressively, which has made the dollar more attractive. Recent comments from Fed officials seem to support this notion and there is now more uncertainty over whether they will follow through with another 0.25% rate cut next month. This afternoon’s US inflation data (CPI – 1.30pm) will therefore be closely watched, as any surprise on the upside could dramatically change the odds on a December cut and consequently lead to further Dollar strength.

The Euro has continued to be on the backfoot since the US election news. Markets are concerned that Trump could target European trade following the threats he made during his campaign (e.g. tariffs of between 10-20% on any imports). Furthermore, news that the governing coalition in Germany has collapsed (with fresh elections in Feb) has added to the Euro’s woes. Talk of parity in the EUR/USD pair has now intensified, with a number of the big banks slashing their forecasts for the main exchange rate in the past few days.

In other news, Sterling performed poorly yesterday following a mixed UK jobs report. The UK unemployment rate jumped to above consensus to 4.3% last month (from 4%), its highest level since May. However, the data showed continued upside pressures in wages. Average earnings growth including bonuses accelerated again, rising to an annual pace of 4.3%, up from 3.9%. The latter should provide the Bank of England with little incentive to adopt anything more than a gradual easing cycle in the coming months, with the market only pricing in two additional 0.25% cuts in the next year.

As a result, the GBP/USD is trading around a 3mth low having lost nearly 2-cents this week. The EUR/USD is down around 3-cents since the US election and had touched the lowest levels since Nov 2023. The GBP/EUR has come off its most recent highs having fallen around 1-cent from Monday and trading around a 1-week low. Next up we the US inflation data out at 1.30pm today and UK growth data (GDP) on Friday morning.

Trump win continues to support the USD


The USD has rallied against almost every currency overnight as Donald Trump has won the US election with a big overperformance versus the polls.  

Expectations leading into the vote were that this was going to be one of the closest run races in living memory. However, as was the case in both 2016 and 2020, both the opinion surveys and prediction models once again grossly underestimated Republican support, with Trump not only achieving a big victory in the electoral college, but an outright win in the popular vote.

The dollar started to strengthen overnight as early results showed Trump was performing well in the key battleground states. This continued as Trump wins in key swing states started to be projected and later declared (North Carolina, Wisconsin, Pennsylvania and Georgia). Indeed, it now looks likely he will take victory in all seven key swing states.

Generally, markets are taking the view that another spell in the White House for Donald Trump is a bullish development for the USD. Some of key beliefs for this are as below:

1) Trump’s preference for lower US tax rates. Proposals for sweeping tax cuts under President Trump are seen as lifting near-term US growth, which may lead to higher inflation and therefore higher US interest rates (which makes the USD more attractive to investors seeking higher yields).

2) Greater protectionism means higher US tariffs, particularly on China and Europe. The implication here is that these tariffs could be a precursor to weaker global growth under Donald Trump. This is a scenario that would see investors potentially favour safe-haven assets, such as the USD.

3) Another Trump term may ensure higher geopolitical uncertainty, which is also not favourable for risk appetite. Support for Ukraine is not guaranteed, nor does Trump hold a particularly favourable view towards NATO.

As a result, the Euro was the worst performer against the USD among the major currencies, as investors brace for potentially onerous European tariffs and a heightened security risk. The EUR/USD has lost around 2-cents overnight and hit a 4-mth low. Sterling has proved to be more resilient against the USD, in part due to its lower exposure to global demand, but the GBP/USD is still down around 1.3% from the high it reached overnight and now trades at a 6-day low. The GBP/EUR is up 0.5% today and trading at a 1-week high.

So far, the moves in the FX market have been relatively contained versus many expectations. However, it’s very early days and we would expect volatility to remain elevated over the coming trading sessions, as investors position themselves in anticipation of another Trump presidency. This could potentially mean fresh downside in risk assets and another bout of USD strength, particularly should the Federal Reserve hint to markets at upcoming policy meetings (possibly even at tomorrow’s) that the outcome of the election may slow the pace of their interest rate cutting cycle.

In terms of actual US government policy change, we will have to wait until 20th January 2025 for Trump’s inauguration. However, Trump’s rhetoric in the meantime will be closely watched by market participants and any commentary that doubles down on his tariff threats and tax cuts may cause a further flight to safety (e.g. USD).

USD rallies as Trump wins historic election

Sterling has lost ground in the last 24hrs as investors show a delayed reaction from Wednesday’s Autumn budget. 

New UK chancellor Rachel Reeve’s budget delivered massive extra spending plans totalling £70 billion each year. This will be funded by huge tax hikes (circa £40 billion per year, which is the largest in more than 30 years) and increases to borrowing by around £30 billion per year. While markets initially reacted in a relatively relaxed fashion to the budget, gilts (UK government bonds) later started to be sold-off and yields extended their rally yesterday amid widespread concerns over how this may ultimately weigh on UK growth. While the Labour party are claiming this new investment will spur UK growth and restore stability to the economy, markets are sceptical over whether this extra stimulus will be enough to offset the negative impact to household disposable incomes from the tax hikes and higher borrowing costs that are likely to ensue. 

In other news, the Euro has strengthened this week by some encouraging economic news out of the region. The latest EU growth report (GDP) showed their economy grew by 0.4% in the three months to September, which was double the 0.2% estimate. Data this week also showed that Eurozone inflation also rebounded off its 3-year lows in October. This has increased expectations that the ECB will take a less aggressive approach to interest rate cuts which has made the Euro more attractive. 

As a result, the Pound lost around 1% against both the EUR (mid-Sept low) and USD (mid-Aug low) yesterday but it’s since recovered around a third of this today. Focus today turns to this afternoon’s nonfarm payrolls report (1.30pm), but investors will have at least one eye on next week’s US election, which remains a tough one to call. Trump remains the front runner in the polls and prediction models, but his apparent advantage appears to have waned this week, and markets are back viewing the election as almost akin to a coin-toss.

Sterling falls following delayed reaction to budget

Sterling has weakened this morning after a surprise miss in the latest UK inflation report.

The CPI data showed that annual inflation dropped to a 3.5-year low of 1.7% last month versus expectations for 1.9%. Core inflation also eased to 3.2% (vs 3.4% estimate), which is the lowest level since September 2021. Not only should the data effectively guarantee another BoE rate cut in November (>90% priced in), but there is also now a heightened possibility that both the vote is unanimous and that the MPC strikes a more dovish tone in its communications. Market expectations are now around a 0.75% chance of back-to-back cuts in November and December.

Upon release of the data, the GBP/USD dropped nearly 0.75% and close to a 2-month low. The GBP/EUR fell just over 0.5% but continues to trade around buoyant levels. Next up, the market focus will shift to tomorrow’s European Central Bank interest rate meeting, US (Thurs) and UK (Fri) retail sales data, alongside a barrage of Fed policymaker speeches on Friday afternoon.

Sterling drops as UK inflation decelerates  

Risk aversion has been sweeping through financial markets so far this week due to the heightened tensions in the Middle East.

Equity markets worldwide are trading lower and perceived ‘safe haven’ currencies (e.g. USD) have outperformed most of their peers. The involvement of Iran in the conflict is a worrying development for markets, with investors rightly fearful that retaliation from Israel could disrupt global oil supplies - Iran is the seventh largest oil producer in the world. Israel’s PM Netanyahu has vowed to strike back, and we would expect another leg upwards in oil should these threats materialise, particularly should it target the country’s oil refineries.

The USD had already strengthened earlier this week following some hawkish comments from Fed chair Powell and yesterday’s US services data (ISM) has dramatically reduced concerns over an imminent slowdown in the US, which has further bolstered the dollar. Investors’ focus will now turn to this afternoon’s non-farm payroll figures (1.30pm) for further clues on the state of the US labour market and how this will interest rate expectations.

Sterling lost ground yesterday following some surprisingly dovish comments from Bank of England chief Andrew Bailey. Markets were caught off guard as, seemingly out of nowhere, Bailey said that the bank could be ‘a bit more activist’ on rate cuts should we see further good news on UK inflation. Although the UK data has not necessarily deteriorated to an extent that would warrant such a shift in policy stance from the BoE since their last meeting and inflation remains in line with their forecasts, the comments were enough for markets to increase their expectations of more aggressive rate cuts from the BoE, which weakened the Pound. However, cautious comments from BoE Chief Economist Huw Pill this morning have provided a little bit of support Sterling. He said that "Further cuts in the bank rate remain in prospect but it will be important to guard against the risk of cutting rates either too far or too fast".

As a result, the GBP/USD rate is trading around 2.5 cents lower than where it started the week and touched a 3-week low earlier. The GBP/EUR dropped over 1% yesterday to hit a 2-week low but has since recovered 0.5 cent. The EUR/USD has dropped around 1.5% this week and trades around a 3-week low.

Risk aversion dominates markets this week. USD stronger. 

Sterling has pushed higher and the USD has weakened following their respective central bank interest rate meetings.

The Federal Reserve decided to cut interest rates by a jumbo 0.5% last night. Expectations over the past week had been for a smaller 0.25% cut, but this changed over the past couple of days with the market sensing a larger cut was on the cards. So, although the USD weakened, the moves weren’t quite as dramatic as they could have been as it was largely priced in. Inflation appears to be less of a worry for policymakers and instead concerns are increasingly turning towards the Fed’s second goal, maximum employment. Their forecasts support these feelings, with a higher unemployment rate now projected and less persistent inflationary pressures compared to their last set of forecasts.  

As expected, the Bank of England have just voted to keep interest rates on hold. However, there was only one dissenter voting for a 0.25% cut (8-0-1) versus expectations for two dissenters, which has helped support Sterling on the release. Policymakers clearly still have enough concerns over the lingering UK inflation that they’re prepared to move slowly with regards to cutting interests. Therefore, providing UK inflation continues to be stubborn and the labour market remains tight, this may provide some underlying support for Sterling over its major peers, who at this stage appear to be cutting more aggressively.

As a result, the GBP/USD rate has hit the highest levels since February 2022 having pushed up 1% today. The GBP/EUR is up around a quarter of a percent but towards the top end of where it has traded since the start of August. The EUR/USD is up a cent today and trading around a 3-week high.

Fed cut by 0.5%, BoE on hold 

Currency markets remain in a state of flux ahead this week’s Federal Reserve (Weds) and Bank of England (Thurs) interest rate meetings.  

Investors are bracing themselves for the first US Federal Reserve interest rate cut since 2020. The ongoing question is whether this will be a more conservative 0.25% cut or a larger 0.5% cut. Swings in recent market expectations have created a lot of volatility in the USD and we expect this to continue into and after Wednesday’s decision. Traders are currently pricing in around a 59% chance of the larger 0.5% cut and therefore it’s still very much in the air. Along with the rate cut, analysts will also be focusing on the bank’s projections for the future path of interest rates over the next few years. So, regardless of the size of the cut, the tone in the accompanying statement and their future projections could also play a large part in how the USD performs in the coming weeks.

As anticipated, the European Central Bank cut interest rates by 0.25% on Thursday. They also lowered their growth forecasts but at the same time adjusted their core inflation estimates higher. Importantly, they signalled that another rate cut in October was very unlikely, which helped to counter the weaker growth outlook and ultimately helped support the Euro. This was particular evident against the USD where it seems the paces of cuts in the Eurozone will be at a slower pace than across the Atlantic.

The Pound remains relatively buoyant moving into this week’s Bank of England meeting. Although last week’s UK growth data missed expectations, it hasn’t materially altered the view that the UK economy is performing much better than economists had expected at the start of the year. In particular, the labour market is proving particularly resilient and inflation remains around the BoE’s 2% target. Markets are therefore expecting the BoE to keep rates on hold this week, as it’s likely policymakers will want to continue monitoring the data for further clues on when to next act. Consequently, Pound traders will instead be paying very close attention to the voting pattern. A close vote, with a handful of dissenters in favour of an immediate cut, could trigger some downside in the pound.

As a result, the GBP/USD has recovered nearly 2-cents from last week’s low and now trades at a 10-day high. The GBP/EUR continues to trade within a relatively tight range but towards the upper end of the past week. The EUR/USD has risen around 1% from last week’s low and now trades around a 2-week high.

Markets brace themselves for US rate cut

Sterling has recovered some its recent losses following better than expected UK job and earnings figures.

The data showed the unemployment rate declined to 4.2% in the three months to June versus expectations for an increase to 4.5% (and a previous reading of 4.4%). Furthermore, the average earnings in the three months from April to June came in at 5.4% versus expectations of 4.6%. This has supported the Pound as it reduces expectations for how aggressive the Bank of England will be with future rate cuts.

There’s been a rebound in global stock markets after last week’s sharp selloff which has improved risk sentiment and encouraged investment back into the Pound. However, there is still underlying cautiousness in the market around the deepening crisis in the Middle East and how far things will escalate. This is keeping the USD more resilient against its peers and seemingly keeping a lid on the GBP/USD rate at the moment.

As a result,  the GBP/USD rate has recovered around 1.1% from last week’s low and currently trades at an 8-day high. The GBP/EUR rate is up by around 1.2% from last week’s low and also trades at an 8-day high. Further clues on how well the UK economy is doing will be provided by tomorrow’s UK inflation data, Thursday’s UK growth data and Friday’s UK retail sales figures. So, we might see further volatility in the Pound as the week progresses. We also have some key US data releases this week, including US inflation figures (Weds), US retail sales (Thurs) and US consumer sentiment (Fri).

Pound climbs as unemployment rate unexpectedly falls

Sterling has moved lower today and safe haven currencies have rallied as market risk sentiment sours.

Stock markets across Europe and Asia have slumped this morning amidst growing concerns around a US economy slowdown. This has largely been triggered by weaker-than-expected US jobs data out on Friday afternoon. The US nonfarm payrolls report for July came in at 114k versus expectations closer to 175K, but the bigger surprise surrounded a jump in the US unemployment to 4.3% versus expectations (and previous reading) of 4.1% This – combined with some more recent weaker US data – may indicate that the US economy is struggling to bear the consequences of sustained higher interest rates. This has ramped up market odds for heavier interest rate cuts from the Fed (including a potential 0.5% cut next month) and therefore weakened the USD.

Growing fears of a deepening conflict in the Middle East have further boosted the flight towards perceived safe-haven currencies (e.g. Japanese Yen and Swiss Franc). Iran has promised to retaliate heavily after the assassination of Hamas leader Ismail Haniyeh on Iranian soil. Over the weekend, Iran-backed Hezbollah confirmed they launched dozens of missiles on Israel and concerns are growing over how far Iran will go with their reprisals. 

As a result, the US dollar has been suffering from the repricing in interest rate expectations which has pushed the EUR/USD rate up nearly 2-cents from Friday’s low and to a 5mth high. This move out of the USD and into Euro – combined with Sterling’s sensitivity to risk aversion – has dragged the GBP/EUR lower by over 2-cents from Friday and it now trades at an 11-week low. The GBP/USD has been choppy but continues to trade towards the lower end of where it has been over the past month. 

We have a fairly quiet week in terms of data and traders will continue to monitor the fallout from last week’s US jobs data and see whether there’s been somewhat of an overreaction (i.e. could there be a countertrend move). They’ll also be closely watching for any development out of the Middle East. 

Sterling declines as market risk aversion increases

UK interest rates were cut today for the first time in four years, down to 5% (a cut of 0.25%).

The decision arrived on a knife edge, with four MPC members voting to keep rates on hold being overruled by five voting in favour of the cut.

Prior to the decision, the market expected the outcome to be very close, but expectations shifted slightly more towards a cut as the morning drew on. Therefore, Sterling had already lost some ground going into the event, so was relatively unphased upon the decision with any losses quickly stemmed. In the press conference that followed, Governor Bailey didn’t give too much away about further cuts and implied that they’ll be guided by the data.

As things stand, traders are pricing in around a 55% chance of another rate cut at their next rate-setting meeting in September (19th). So, it could be another close call, but there are two key inflation reports (CPI – 14th Aug and 18th Sept) ahead of that meeting which could change these odds depending on their outcomes.

As a result, Sterling has been relatively choppy today. The GBP/USD has touched a 4-week low earlier but has since clawed back 0.5 cents and it currently trades at a 3-week low. The GBP/EUR had fallen to the lower end of its 3-week range but has now pulled back around 40pips since the earlier falls. Traders will now move their focus over to tomorrow’s US nonfarm payroll figures to gain a clearer picture of how well the US economy is performing. 

BoE cut rates for first time in 4yrs

The pound was unmoved overnight as the results of the UK general election confirmed what markets had long been pricing in: a Labour landslide victory.

The margin of victory will end up being quite a lot less than both the polls and projections had anticipated. Currently, Labour has won 411 seats in the House of Commons versus 119 for the Conservatives with 6 seats to declare. Whilst this isn’t quite the 280 seat majority that some had braced for, this will do little to obstruct new Prime Minister Starmer’s ability to force policy changes through the House of Commons.

Sterling has been supported in the lead-up to the vote, as investors currently see a Labour government as the best-case scenario for the UK economy. In particular, expectations that they will favour closer UK-EU relations has seemingly increased business confidence. Starmer will now have to convince investors that he has a credible fiscal plan that will boost UK growth to ensure that he doesn’t trigger an adverse reaction in bond markets (as what happened after Liz Truss’s mini-budget). Any suggestion of larger tax hikes than those laid out in the party’s manifesto would, however, likely be greeted negatively by market participants.

As a result, the GBP/USD trades towards the higher end of the range we’ve seen this year and currently at a 3-week high. The GBP/EUR remains buoyant but barely moved from yesterday with the market trading around 1.18.

Today’s US non-farm payrolls report will be the next big event for markets, followed by Sunday’s second round French election. So far, markets have been reacting in a sanguine manner to the French election, as Marine Le Pen’s far-right party are seen falling short of an absolute majority. Should this be confirmed at the weekend, the euro could rally modestly, albeit this seems largely priced in. A surprise National Rally majority would almost certainly trigger some downside in the Euro.

Sterling unmoved as Labour landslide confirmed

As expected, the Bank of England have just voted to keep interest rates on hold and the split in votes mirrored May’s decision with seven votes to keep on hold versus two to cut.

The accompanying statement said that the decision was ‘finely balanced’ for some (slightly dovish), but a line that previously said things were 'moving in right direction’ for a cut was removed (countering this). The BoE re-iterated that rates are ‘under review’, but the bank ‘needs to be sure that inflation will stay low’. Growth forecasts were also upgraded slightly from the last meeting with Q2 GDP seen growing 0.5% (from +0.2% in May).

Sterling has come off modestly since the decision, as the BoE have kept the door ajar to an August cut without firmly committing to one. Market odds for an August rate cut have now increased to around 45% (from 28%), with September up to 92% (from 80%). 

Yesterday’s UK inflation data also came in line with expectations (at BoE 2% y/y target) and showed that prices are continuing to move lower. Next month’s UK inflation data release could be key in determining whether the BoE cut rates in August, as another decent drop lower in prices would likely give them enough confidence to make their first cut since this inflation crisis began.

BoE keep rates on hold. Odds rise for Aug cut (45%)

Yesterday saw UK inflation figures fall in line with expectation, with year-on-year annual figures fall to the target 2%, and core inflation reduce to 3.5%. Whilst this is promising, it must be noted that key inflation metrics show services pricing inflation is still around 5.5%, and food prices about 25% higher than they were two years ago.  

At midday today the BoE interest rate decision is set to take place. With consensus that rates will remain unchanged (staying at 5.25%), traders will be more focusing on the accompanying statement and voting pattern of the policy committee.

If more than two policymakers vote in favour of a rate cut, then there's a chance of some initial Pound Sterling weakness against its peers. On the other hand, Sterling could stay within its recent range if the BoE refrains from making any notable changes to its policy statement and the vote split remains the same (i.e. with seven officials voting for a hold). 

As we go into the afternoon GBP/USD trades just over 1.27 on UK inflation as expected before interest rate decision.the market, having retreated from previous gains, and GBP/EUR still trading firm into the 1.18’s.

UK inflation as expected as BoE interest rate decision awaits

Despite high UK unemployment figures which temporarily offset the Pound earlier this morning, this has been return-served by a small flurry of sterling support, extending further on yesterday's gains. 

Alongside this, the Euro has looked to be under bearish pressure as of late as a result of negative market sentiment around the recent ECB rate cut announcement, with rumours more cuts may look to follow depending on the decision of other Central banks.

As a result, we now see GBP/EUR reaching towards the high 1.18s, building on its highest levels since August 2022. This all comes before the US inflation figures & the Fed Interest rate decision tomorrow, which of course depending on outcome could lead to flows in/out of the Dollar indirectly affecting sterling even further. 


GBP/EUR trading near 2 year-high

This afternoon’s non-farm payroll figures saw a total of 275k new jobs created in the US last month, just shy of 100k more than expected. This was accompanied by a 4.1% rise in average hourly earnings in May from the same time last year.

As a result, this has seen the US Dollar gather some bullish momentum and claw back on some of its recent losses. GBP/USD has consequently fallen almost a cent to the bottom of 1.27 territory.

Traders will look to have a keen eye on the UK's employment figures on Tuesday next week, and then importantly Wednesday's pairing of US inflation & the FED interest rate decision that follows after, where no doubt the inflation figures that precede will look to have a huge input on the decision of cutting rates or not.

US employment data supports the dollar

Sterling has continued its good run this morning following the latest UK inflation figures.

Although the data showed that UK inflation fell sharply last month, it hadn’t dropped as much as the market expected which has lent support to the Pound. The headline CPI figure fell from 3.2% to 2.3% but markets were forecasting it to be closer to the Bank of England (BoE) target and at 2.1%. Importantly, services inflation, which is a key concern for the Bank of England, eased only slightly from 6% to 5.9%.

The report has therefore raised fresh doubts about the timing of interest rates cuts in the UK. The odds of a pause in rates being extended further have increased to the point where the market now views a June cut as clearly premature and is instead wondering if the BoE will now hold off until late summer or even longer (the first cut is not fully priced in until November). 

As a result, Sterling has pushed slightly higher today and it has now overtaken the US dollar to become the best performing G10 currency of 2024. This quite a dramatic shift in sentiment versus where we were a couple of weeks ago. The GBP/USD is up nearly 3-cents from where it was trading 2-weeks ago and now trades around a 2-month high. The GBP/EUR has edged up around 1.1% in the past 2-weeks and has also hit a 2-month high, albeit still contained within the familiar range we’ve seen over the past couple of years.

Next up, tomorrow sees the release of the UK, US and Eurozone PMI figures which is followed by Friday’s UK retail sales figures and US durable goods/consumer confidence.

Sterling supported as UK inflation above expectations 

Sterling ended up taking a slight hit following the BoE interest rate decision at mid-day. Despite the overall decision to keep rates unchanged as expected, we saw two of the nine voting members vote in favour of cutting rates this month, with originally only one member anticipated to do so. This saw sterling take a light dip, with GBP/USD initially dropping half a cent.

As a result, the bets for a June rate cut rose, now priced in slightly more than 50%, with an August cut fully priced in on the markets. The BOE has also lowered its inflation forecasts, seeing inflation at 2.6% in one year's time (previously 2.8%), 1.9% in two years' time (previously 2.3%), and Bailey reinforced this by expressing his optimism that inflation looks to be going in the right direction.

BoE voting pattern leads to sterling slip

Following both UK and US April PMI figures, sterling has seen recovery in the market.

Yesterday morning, UK PMI’s were released showing both the service and composite indexes are performing strong, with service figures landing far above expectations. This positive data acts as a big indicator to show the UK economy is making headway to emerge from the technical recession it found itself earlier in the year. This boost of optimism around the economy has increased traders risk appetite for the Pound and, as a result, Sterling has made some recovery from its recent losses.

US PMI’s that were released later that afternoon showed the opposite, with composite, manufacturing, and services figures all taking a beating across the board and falling way below consensus. This saw the Greenback slip back and reverse on some of its recent gains, which in turn also led to further flows into the Pound.

As a result, the GBP/USD has now bounced back into the mid 1.24’s. Traders will be keen to keep an eye on US economic data due this week, including US durable Goods orders, Q1 GDP, and US Core personal expenditure figures on Wednesday, Thursday & Friday respectively. These will hopefully provide further indication on the overall outlook on the US economy, which may consequently steer appetite on the Dollar.

Sterling recovers some of recent losses following services data

The USD has rallied in the past 24hrs following a higher-than-expected US inflation figure and rising geopolitical tensions in the Middle East.

Data out yesterday afternoon showed that US inflation (CPI) rose 3.5% in March (from the previous year) which was up from February’s 3.2% increase and higher than market expectations for 3.4%. This created a large swing in the probabilities of the Federal Reserve keeping interest rates on hold in June from a 40% chance before the data release to odds of over 80% afterwards. This has made the USD more attractive to investors seeking higher yields which has led to a flurry of dollar buying in the past 24hrs.

As a result, the GBP/USD has fallen nearly 1.2% in the past day and now trades towards the lower end of where it’s been in the past 4-months. The EUR/USD has lost around 1.2% since the US inflation data and trades close to a 2-month low (and not far off its 5mth lows). The GBP/EUR remains contained within the familiar ranges we’ve seen this year (circa 1-cent range this year). Next up we have the European Central Bank interest rate meeting this afternoon followed by US producer price data. Then tomorrow afternoon we have the US consumer sentiment numbers.

Dollar rallies following upbeat US inflation data

The USD has rallied against the GBP over the past 48hrs following the latest Fed and BoE meetings and an increase in risk-aversion.

As expected, the Federal Reserve interest rate meeting on Wednesday night was a bit of a non-event.  There was a unanimous vote to keep rates on hold and there was very little change to the bank’s statement, which was an almost word for word replication of the January meeting. Importantly for markets, there was no softening in the Fed’s stance on inflation, with policymakers repeating the line that it does not expect to start easing policy until it has ‘greater confidence inflation is moving sustainably to the 2% target’.

Sterling weakened yesterday after a ‘dovish hold’ from the Bank of England. Two of the previous hawks changed their votes this month to favouring no change which meant nearly all favoured to keep things on hold (bar one who voted for a rate cut). The central bank also reiterated that it is ‘not yet at the point’ where it can start cutting rates, although it also added a line to its communications that conditions for lower rates were ‘moving in the right direction’. This week’s UK inflation report for February surprised to the downside and there appears a general sense of optimism among BoE members as to its downward trajectory. Indeed, the BoE sees inflation falling below 2% in a matter of months, which markets believe opens the door to the first rate cut in the not too distant future (three-in-four change for first cut in June).

As a result, the Pound has lost ground against the USD with the GBP/USD falling nearly 2-cents in the past 24hrs with it now trading towards a 1-mth low. The GBP/EUR has slipped nearly 1-cent in the past 24hrs and now trades around a 2-mth low. Next up, markets will be watching this afternoon’s Fed Chair Powell speech for any further clues.


Sterling slips following latest BoE meeting

The US Dollar is benefiting from today's market sentiment, now trading at a 2-week high against the pound and now into the 1.26s. This precedes a busy latter end to the week of US, EU & UK economic data.

Kicking off on Wednesday morning a hat-trick of data is expected to arrive out of the UK including PPI, Retail index, and the highly anticipated CPI (inflation) figures. Later on Wednesday, the ECB's President Lagarde is set to speak to give the latest outlook on the Eurozone economy. This is followed by the Fed interest rate decision in the evening where traders will be listening out for any further insight to when rate cuts will arrive.

Thursday morning then sees Eurozone & UK PMI figures for Manufacturing. However, the BoE rate decision taking place at mid-day will look to steal the show. A vote to keep rates unchanged is almost entirely priced in on the markets, however again traders will be keen to see how the voting pattern pans out across the MPC, and very importantly as to whether the traditionally hawkish Catherine Mann continues to vote in favour of a rate hike, or change tune to keep rates at 5.25%. Notably, we then have US Manufacturing PMI's in the evening to complete the trifecta.

To round off the week, UK retail sales for February are set to published in the early hours of Friday, with prediction of -0.3% growth from the same time last year. Finally, later on the Fed's Chair Powell is due to speak to perhaps shed some further light on the policy makers longer term approach to US interest rates post- Wednesday's rate decision.


Greenback strengthens ahead of data flurry

After a few quiet weeks in the FX market, things have sprung back into life the past few days with major currency pairs breaking out of their recent ranges. Sterling has been one of the biggest winners of these moves.  

A move out of the USD earlier this week was triggered by Fed Chair Powell’s semi-annual testimony to Congress. He noted that lower rates ‘would likely be appropriate this year’ should the US economy evolve as expected, which has seemingly pushed investors to believe that a June interest rate cut is now firmly on the cards. Coupled with some weaker US services sector and jobless claims data, the USD has remained on the backfoot as the week has progressed. 

In other news, the Pound took this week’s UK Spring Budget in its stride, as no real surprises were announced, but it still managed to rally to its strongest position against the dollar so far this year, as investors sold the USD en masse. The latest growth forecasts from the OBR also provided some reason for cautious optimism, with modest growth of 0.8% seen in 2024 before expansion accelerates to 1.9% in 2025, which gave investors further reason to buy into Sterling.

As a result, the GBP/USD has pushed up around 2-cents in the past week and currently trades around a 7-month high. The GBP/EUR has moved up around 0.7% this week and trades at a 3-week high but not far from the top end of where it’s traded since August 2022. Eyes will now turn to this afternoon’s non-farm payroll report which might dictate how the USD fairs over the coming week.

FX Market springs back to life. Pound benefits

Sterling has given up some ground over the past couple of days following the release of the latest UK growth and inflation figures.

UK GDP figures out this morning confirmed that the UK slipped into a technical recession at the end of last year, with GDP contracting by 0.3% in Q4 after falling by 0.1% in the previous quarter. Although a technical recession was predicted, the contraction in the last quarter was larger than expected (forecasts were for -0.1%), which shows the impact of tight financial conditions and still-elevated inflation continued to be felt across the economy.

Yesterday’s UK inflation numbers (CPI) also surprised on the downside and together these figures may help ease some of the Bank of England’s concerns over the persistence of price pressures. At the same time, however, Tuesday’s UK labour data came in better than expected and forward-looking data such as this suggests the economic downturn is not extending into this year, with activity seemingly picking up at the start of the year. Consequently, although Sterling has lost some ground over the past 48hrs, its losses have been relatively contained so far. Traders appear to believe that the BoE won't be in a rush to cut interest rates anytime soon, with June looking likely the earliest date for a first rate cut. 

As a result, the GBP/USD is down about 1% from Tuesday’s high and trades close to a 9-day low. The GBP/EUR is down by around 0.7% from Tuesday’s high and also trades close to a 9-day low. Pound traders will keep an eye on tomorrow’s UK retail sales figures but, with investors’ attention seemingly more focused into forward-looking data, markets will be more interested in next Thursday’s UK PMI data releases.

GBP on back foot following GDP and Inflation data

The USD has been rallying following a strong US labour market report out on Friday afternoon. 

The data showed strong rebounds in job creation (+353K jobs vs expected +180K), average earnings (4.5% vs expected 4.1%) and a fresh drop in the unemployment rate (3.7% vs expected 3.8%). This report, along with the Feds pushback against the market’s March rate hike, has forced traders to pare back to near zero chances of a March rate cut by the Fed, which has sent the USD higher. 

As a result, the GBP/USD has fallen over 2-cents from Friday’s high and now trades at the lowest levels since the 13th December. The EUR/USD has fallen around 1.5% since Friday’s US labour data and now trades close to the lowest levels since the 14th November. Major data releases are relatively sparse this week and further direction may be provided from various speeches by different Federal Reserve policymakers.

Dollar rallies after blowout US labour report

Sterling is relatively buoyant following yesterday’s Bank of England interest rate meeting.

Although they hinted at the possibility of interest rate cuts in their statement, they also warned markets this may be a little way off and that more evidence on inflation coming into line would be needed. It seems that committee members will need to see far more signs of disinflation, and probably an easing in wage pressures, before committing to cuts which has reduced market expectations for more immediate aggressive rate cuts and therefore supported the Pound. 

The vote was a mixed one with six of the nine policymakers voting to keep rates on hold, two to raise rates and one to cut by 0.25%. This is the first time since August 2008, and the early onset of the global financial crisis, that BoE policymakers have voted to both raise and lower the base rate at the same policy meeting. They also revised their growth forecasts upwards (2024 from 0% to +0.25%, 2025 from +0.25% to +0.75% and 2026 from +0.75% to +1%). UK inflation is also seen falling to target in Q2 but expected to rise thereafter and not return to target until the end of 2026.

In other news, the USD made gains on Wednesday night as the Federal Reserve appeared to push back on a March interest rate cut. Although they indicated that cuts were on the way, Chairman Powell stated that the Fed’s base case scenario isn’t for a March cut and that more data on inflation would be needed. Initially, the USD rallied following this meeting, however it quickly reversed course yesterday, as markets continue to cling onto the possibility of a cut at the Fed’s next meeting and as worries increase over US regional banks and losses linked to commercial real estate.

As a result, the GBP/USD is trading towards the top of the range we’ve seen this year. The GBP/EUR is trading around half a cent off the high we saw last August. The EUR/USD has rallied a cent higher in the past 24hrs and trades at an 8-day high. All eyes will now turn to this afternoon’s US non-farm payrolls report for further clues on the state of the US economy.

Sterling buoyant following latest BoE meeting

The Pound has pushed higher this morning following upbeat private sector data and improved risk sentiment.

Both UK services and manufacturing sector data (PMI) came in better than expected (53.8 vs 53.2 and 47.3 vs 46.7 respectively). This is further evidence the UK economy is performing fairly resiliently at a time when inflation continues to be stubborn. This might give the Bank of England more flexibility on when to make the first rate cut (i.e. they can leave these high interest rates for longer to allow more time to impact on prices) and hence has supported Sterling this morning.

As a result, the GBP/EUR has hit the highest levels since Sept ’23 and the GBP/USD is up nearly 1-cent and close to a 2-week high. Later today, we have the US PMI survey data which may create some further movement in the GBP/USD depending on how far off expectations these come in. That said, movements may be relatively contained if investors opt to wait until tomorrow’s US growth figures (GDP) before taking any large positions.

Sterling higher on upbeat UK services data

The Pound has claimed some ground back following the latest UK inflation figures. 

The price data came in higher than expected, edging upwards for the first time since last February (4.0% vs. an expected 3.8%), while the core measure (5.1% vs. 4.9%) also increased at its fastest monthly pace since last May. This will be unwelcome news for UK households, who will once again be dealing with elevated prices and the prospect of higher interest rates for longer. 

The chances of a May rate cut from the Bank of England are now around 50% versus odds of over 80% last night. The Bank of England may need to see more evidence of a downtrend in both inflation and wages before it can signal lower rates ahead, so we may have to wait until at least the June BoE meeting before we see the first interest rate cut. This could provide some underlying support, and potentially limit any major downside, for Sterling in the short term.  

Across the pond, the market’s aggressive bets in favour of Federal Reserve interest rate cuts sent the USD to a one-month high against its major peers yesterday.  The US Dollar Index ended the London trading yesterday around its strongest position since the 13th December, as investors are back in doubt to whether the Fed will lower rates after its March meeting. 

As a result, the GBP/USD has recovered most of the losses from yesterday and has moved around 0.75 cents higher since the UK inflation release. The GBP/EUR has risen around 0.5% this morning and now trades close to a 5-week high. Next up we have US retail sales this afternoon and UK retail sales Friday morning.


GBP rebounds following hot UK inflation data

The Pound has come under a bit of pressure this morning and off its recent highs, following lower-than-expected UK inflation data (CPI). Year-on-year prices rose 3.9% versus and 4.3%, which is the lowest reading for over two years (Sept ’21). Although this will come as a welcome relief to households and businesses, it’s changed market expectations for how long UK interest will remain this elevated which has slightly reduced the appeal of the Pound today.
Last week, the Bank of England stressed that it was still far too soon to even discuss the possibility of lower UK interest rates, which had lifted Sterling to its recent highs. So, although today’s data may bring forward these rate cut discussions, it’s likely BoE officials won’t be getting too carried away and one good inflation print shouldn’t be enough for the bank to drastically change in tune during upcoming communications. Core inflation still remains very high and well over double the MPC’s 2% target, while risks to further upside remain in place, most notably the continued sharp increases in annual wages. It may be likely that the BoE will hold the line for now, and continue to dampen expectations for imminent rate cuts, which might present some upside for sterling in the near-term.

In other news, some cautious comments on interest rates from Federal Reserve officials have failed to prevent the sell-off in the USD in the past few days. The dollar collapsed in the second half of last week, after the Fed issued a downward revision to its interest rate forecasts, while Fed chair Powell said discussions were already being had on the timing of US interest rate cuts. Since then, however, a handful of Fed members have attempted to calm market speculation, to little avail. The market had moved closer to expecting the first rate cut in March next year but many still don’t expect the first cut to come until around June 2024.

As a result, the GBP/USD is down around 1-cent today and towards the bottom of where it’s traded over the past 6-days (albeit still only around a cent off the highest levels since August). The GBP/EUR is down half a cent and now trades around a 3-week low. Next up, we have US and European consumer confidence figures this afternoon and then US GDP and PCE inflation data tomorrow.

Sterling off recent highs following UK inflation data

The US Dollar was sold heavily yesterday afternoon following weaker-than-expected US inflation data.

Although the data only slightly missed expectations (0.1% lower on year-on-year, month-on-month and core estimates), it was enough for markets to seemingly rule out the chances of any further rate hikes from the Federal Reserve. In fact, markets are now pricing in the first US rate cut to happen around May next year instead. This shift in interest rate expectations has caused a move out of the USD and triggered a sharp move lower in long term Treasury yields.

As a result, the GBP/USD rallied more than 2-cents and it currently trades around a 2-mth high. The EUR/USD rate jumped around 1.5 cents higher and trades around a 10-week high. Whether this weakness in the USD will continue remains to be seen. However, the data only missed by a small amount and was mainly down to a drop in energy prices, so the fallout from this has been quite surprising. Furthermore, US Core inflation remains around double the Federal Reserve’s target and their recent communications continue to signal they’re not going to be cutting rates before it returns to those target levels.  

In other news, UK inflation data out this morning also showed a lower reading than expected. This showed annual inflation in October dropping to a 2-year low at 4.6% versus an expected 4.8%. This is a steep drop from the previous month (6.7% - Sept) and is largely being attributed to a reduction in household energy bills. The data hasn’t had any major impact on Sterling this morning, however, as investors already believe the Bank of England are done with hiking rates and this is just further confirmation of these suspicions.

It doesn’t feel like we’re quite at the end of this inflation story though and there could be some further twists down the road. One thing is for sure though and that is the key economic data releases are likely to continue attracting a lot of attention as investors seek to confirm or reject their current beliefs on where interest rates are heading. Next up we have this afternoon US retail sales figures and then UK retail sales figures on Friday morning.

USD hit following inflation data as markets believe hiking cycle is over

Following yesterday's news of disinflation, the BoE have voted against another interest rate hike, keeping rates at 5.25%, bringing the streak of 14 successive hikes to an end.

The vote was won on a knife edge of split decision, with the 4 policy members voting in favour of a rate hike being overruled by the 5 voting to keep rates unchanged.

As a result, sterling has seen further decline in the markets, with GBP/USD sliding down into the mid 1.25's, and GBP/EUR now toward the bottom end of the 1.15's.

Sterling slides further following a pause to UK rate hikes

Sterling has come under pressure today following weaker-than-expected UK inflation figures.

The annual consumer price index (CPI) readings for August came in at 6.7% versus analyst estimations for 7.1%. Although this is a positive for struggling households, it has reduced the interest rate expectations from the Bank of England who will release their latest rate decision and meeting minutes tomorrow afternoon. Ahead of today’s figures, the market odds of another 0.25% hike were sitting around 80%, but, following the data, this has now moved to roughly 50%. So, although there’s still many that believe they will hike again tomorrow, it could be the last one in this rate hike cycle and therefore appears that a November hike is now off the cards.

As a result, the GBP/USD dropped around half a cent which moved it down to the lowest levels since the end of May. The GBP/EUR also fell around half a cent and now trades at a 1-mth low. Tomorrow’s BoE meeting will be watched even closer and a hike might provide some initial knee-jerk support for the Pound given the odds have fallen so dramatically. However, for any meaningful support it’s likely the markets would want to be convinced the BoE could still do more hikes. Given the recent flurry of weaker-than-expected UK data releases, this might be a challenge for them to do.

Tonight, sees the latest Federal Reserve interest rate decision and, although no hike is expected, traders will be looking for clues on the latest forecasts and expectations for if/when they might hike again. Expectations have been shifting higher over the previous few weeks as US data continues to be robust and inflation becoming more sticky again. Finally, Friday sees the latest release of UK retail sales figures which will give a good idea on how well the UK consumer is coping with the current economic conditions.

Tomorrow's BoE decision now a coin toss following weaker inflation data

The GBP/USD has fallen heavily over the past week as demand for the US Dollar has risen alongside reduced appeal for the Pound.

Bank of England Governor, Bailey, has signalled that the central bank is getting close to ending its current interest rate hiking cycle. Although UK inflation levels remain the highest out of the G7 economies,  Bailey believes that there are many signs that it is falling back in the right direction and should continue to do so for the foreseeable. Recent UK economic data has generally been softer than expected and the elevated interest rates appear to be having an impact on consumer/business spending and confidence. Therefore, traders’ expectations for further aggressive BoE rate hikes have wound right back, and uncertainty over their next policy meeting (21st Sept) has increased, which has led to a reduced appeal for Sterling.

Conversely, interest rate expectations for the Federal Reserve have been shifting higher following a spate of better-than-expected US data releases which has reduced fears of a recession in the US economy. For example, data yesterday (PMI) showed that the US service sector, which accounts for two-thirds of the US economy, jumped to 54.5 versus an expected 52.5. That’s a large sign that their economy is performing well despite the previous aggressive rate hikes from the Fed and it keeps the door open for further Fed hikes. Markets are extremely sensitive to US data at the moment, so we can expect continued volatility as further data comes out over the coming weeks.     

As a result, the GBP/USD has lost around 2.5 cents over the past week and trades to the lowest levels since mid-June. The EUR/USD has fallen over 2-cents over the past week and trades close to a 3-month low. The GBP/EUR continues to trade within a relatively tight range but towards the bottom end of the past week.   

Next week we will see the latest US inflation figures (CPI Weds), US retail sales (Thurs), ECB interest rate meeting (Thurs), and US consumer sentiment figures (Fri).

USD continues strong run as Sterling falters

Heightened levels of volatility could be expected this week as a raft of UK economic data looks to drive the markets. 

Data this morning showed higher-than-expected UK average earnings at 7.8% year-on-year which suggests the Bank of England may have more room to manoeuvre on raising rates further. However, data also showed a slight pickup in unemployment levels at the same time (4.2%), which helped to reign in bullish momentum for the Pound. 

In addition, it seems traders may wait until tomorrow morning’s latest UK inflation figures (CPI) before making any bigger moves. Whilst it’s predicted the headline UK inflation figure is to drop to 6.8% (down from 7.9% the month prior), and the core figure to drop by 0.1%, if the level of disinflation is in fact more stagnant, this could look to cause a further rally for sterling.

Lastly, on Friday, UK retail sales figures for July will be published. Whilst it’s likely the inflation data prior to this will look to control a lot of market movement, figures here could potentially look to reinforce or alter traders’ positions and short-term sterling outlook ahead of the next interest rate decision dependant on the results.

UK economic data drives sterling market

Sterling has slumped this morning following the release of the latest UK inflation figures.

The data showed prices (CPI) rose 7.9% on a yearly basis versus market expectations for around 8.2% and May’s 8.7%. Although UK inflation levels are still the highest in G7, this data is likely to create a glimmer of relief to the Bank of England who have raised rates at the previous 13 interest rate meetings. Today’s data is a sign that these hikes might finally appear to be making an impact and analysts are now expecting them to be less aggressive at future meetings with expectations for next month’s decision now shifting towards a smaller 0.25% hike.

The UK stock market has rallied on this data and it will be welcome news to UK households, however it has reduced the appeal of Sterling to investors this morning. As a result, the GBP/USD is down around 1.5% from yesterday’s high and now trades around a 1-week low. The GBP/EUR is 1.1% lower from yesterday’s high and sits around a 3-week low.

Pound dented as UK inflation drops to a year low

Sterling has moved higher after data showed UK wages grew at record levels in the three months to May.

The data showed a 7.3% rise in wages versus average expectations for 7.1%, which vindicates the continuation of rate hikes from the Bank of England. Yesterday, BoE Governor Bailey promised to “see the job through” with regards to bringing inflation levels back towards their 2% target level. With UK inflation currently running at 8.7% - a rate higher than any other G7 nation - the BoE certainly have their work cut out and more hikes are expected, which is supporting Sterling.

That said, there were some signs that perhaps the labour market conditions are beginning to loosen a bit because the jobs report data also showed an unexpected rise in unemployment with the rate moving up to 4.0% versus an expected 3.8%. It can sometimes take a bit of time for labour market slack to affect wage growth and therefore this might provide some relief to the BoE moving forward. Certainly, it looks likely they will hike rates again next month, but things are less certain further out and data will be closely scrutinised.

As a result, the GBP/EUR has moved up around 0.5% today and up to a 10-month high. The GBP/USD has also risen around 0.5% today and currently trades at a 15-month. The USD has been on the backfoot from Friday’s non-farm payroll data release, which missed expectations, and eyes will now move onto tomorrow’s US inflation data to provide further clues on the dollar’s direction.

Sterling moves higher following UK earnings data

The US dollar has continued its weaker run following mixed US data and hawkish rhetoric from the ECB.

As expected, the Federal Reserve opted to keep interest rates on hold on Wednesday, but the projections showed that most Fed policymakers expect there to be another couple of 0.25% hikes before the end of the year. However, worst-than-expected US inflation data on Tuesday and yesterday’s weaker jobless claims data might suggest the US economy is slowing, which has lowered market interest rate expectations for the US.

Yesterday, the ECB voted to raise interest rates by another 0.25%. They also revised their inflation forecasts higher and gave a hawkish tone in the meeting with ECB President Lagarde stating they will likely raise rates again next month and that inflation is projected to remain “too high for too long”.  This has made the Euro more attractive to investors and caused a movement out of the USD and into the Euro, which pushed the EUR/USD rate up over 1% yesterday and to a 4-week high.

The GBP/USD has gained around 3-cents this week and trades around a 14-month high. The GBP/EUR remains relatively buoyant and close to its 9-month highs. As things stand, the Pound continues to be more appealing to investors, however, markets will likely move their attention to next Thursday’s Bank of England meeting to guide their next moves on Sterling.  

GBP/USD hits 14-mth high following ECB meeting and US data

Sterling remains buoyant into the new week, ahead of a busy week of central bank interest rate meetings and data releases.

The Pound has continued to benefit from increased expectations the Bank of England will need to keep raising rates to get a grip on stubborn inflation. Tomorrow morning’s UK job figures could be important in determining the market expectations for next week’s BoE interest rate meeting (22nd June).

The Federal Reserve is expected to keep interest rates on hold on Wednesday evening at 5.00-5.25%. However, what they do beyond this meeting is still up for debate and tomorrow afternoon’s US inflation data (CPI) might change the expectation on this, as US inflation remains well above their 2% target.

The Pound is looking towards a sixth consecutive monthly gain against the Euro, as the BoE interest rate expectations diverged away from the ECB’s after the Euro-zones price levels started to cool. The ECB meeting this Thursday will provide further clues on their outlook moving forward.

As a result, the GBP/EUR has been trading up around the highest levels in 9 months and the GBP/USD at 4-week highs.

Pound at elevated levels ahead of a busy week

Sterling has resumed its good run into the new week and continues to benefit from last week’s Federal Reserve and ECB interest rate meetings.

Last Wednesday, the Federal Reserve raised interest rates by another 0.25% but indicated that it may be the last hike in the current cycle. US inflation has slowed down quickly in recent months and the previous aggressive hikes from the Fed appear to be kicking into prices, which has reduced the appeal of the USD. Across the pond, the ECB followed suit on Thursday by raising rates by 0.25%. However, this is a drop in the previous pace of their hiking cycle (last ones have been 0.5% hikes) and they were less hawkish than many analysts expected, which led to the Euro being sold.

In contrast, many analysts believe the Bank of England will have to keep raising rates because inflation appears to be stronger and more stubborn in the UK than the US/Europe. Also, and although by no means booming, the UK economy has been performing better than previously anticipated and, so far, managed to avoid any major recession which (in part) has been helped by a fall in energy prices. As a result, the Pound has been capitalising from the outflows in the USD and Euro, which has pushed it to multi-month highs.

The GBP/EUR has risen around 1.5 cents since the ECB meeting and now trades at the highest levels this year. The GBP/USD trades close to a 1-year high after moving around 1.5 cents higher from the Fed meeting. Traders’ eyes will move onto tomorrow’s US inflation data, Thursday’s BoE interest meeting, and UK growth data on Friday for further direction. Markets expect the BoE to hike by 0.25% tomorrow, but policymakers’ voting patterns, forecasts, along with the accompanying Governor’s speech, will be key things to watch.

Pound capitalises on Fed and ECB dovishness

The GBP/USD has shot up this morning - now back above 1.25 - following on from an improvement in risk appetite and a slight hesitance to whether the Federal Reserve will continue with further rate hikes. Rumours have been emerging that the Fed could look to put a pause to the hiking cycle next and possibly even this time round.

In addition to the above, we also see the release of US employment change figures and PMI data and alongside the FED’s all important interest rate decision, followed by the accompanying monetary policy statement - so an extremely busy day of US data today.

Despite the arising rumours, it's still largely predicted that the Fed will make at least one more 25bp hike (raising the base rate up to 5.25%) to combat inflation. All ears will be fixed in on the statement that succeeds, which might give an indication to the how the Fed will act in June regarding monetary policy, and whether the hiking cycle will look to come to an end. However, it may also be the case that the Fed will restrain from making any overly dovish or hawkish statements until they see the non-farm payroll figures on Friday and inflation data due the following week.

On the other hand, GBP/EUR remains stagnant hovering in the mid 1.13s, as the pair continue to trade within a narrow range. Over in the Eurozone, a 25bp hike for the ECB is almost completely priced in for tomorrow's ECB meeting. However, if we see the ECB take a more hawkish approach to tightening, there could be potential for GBP/EUR to become quite bearish.  

GBP/USD back above 1.25 awaiting Fed rate decision

The Pound has moved higher follower stronger-than-expected UK inflation data.

Figures showed that annual CPI rose to 10.4% on annual basis versus expectations for a 9.8% increase and the previous 10.1% reading. This surprisingly high reading has pushed the odds of a 0.25% interest rates by the Bank of England tomorrow to a near certainty (from a 50% chance yesterday to 90%+ today) and boosted demand for Sterling.

After a chaotic couple of weeks in the market following the collapse of Silicon Valley Bank and the troubles with Credit Suisse, markets will be monitoring this evening’s Federal Reserve Interest meeting with even more focus. Although the odds of another hike from the Fed have whipped around a lot since the SVB issues, a sense of calm has returned to financial markets and, consequently, it’s now extremely likely (circa 80%) the Fed will now follow through with a 0.25% hike tonight.

A hike is likely because US inflation continues to be very stubborn and US jobs market remains strong. Furthermore, a hike from the Fed should give a good vote of confidence in the US banking system and therefore help reduce market anxieties of further issues within this sector. Consequently, traders are likely to be instead focusing on where the Fed believe interest rates will peak and the comments Fed Chairman Powell makes on the recent banking sector issues and USD liquidity.

As a result, the GBP/USD moved up nearly a cent and touched a 7-week high. The GBP/EUR moved up around half a cent and remains relatively buoyant. The EUR/USD also trades near 7-week highs.

Sterling buoyed by hot inflation reading

The Pound has strengthened after receiving incoming flows from the US Dollar following cautiousness around the central banks raising interest rates. Last week, following the SVB crisis, another major bank - Credit Suisse - followed suit with similar issues, and now looks to be undergoing a buyout from by UBS with support from the Swiss National Bank.

This has increased dovish sentiment amongst the central banks and, in particular, the market have shifted their expectations for this week's Federal Reserve interest rate meeting (Weds). Previously, forecasts predicted we could see 25-50bps hike in their continued effort to combat inflation. However, with another major bank in trouble, many traders now believe they will take a much more reserved approach in the short term. As a result, markets are now pricing in a 70% chance of a 0bps increase.

Consequently, Sterling has seen a large benefit from outbound dollar flows, with GBP/USD now trading a cent higher from its opening position on Friday (towards mid 1.22’s), and GBP/EUR matching last week’s highs.

We have a big week of central bank meetings ahead, including the Federal Reserve (Weds) and the BoE and SNB (Thurs), and it’s likely the Fed meeting will take precedent and have an influence on the decisions made by the BoE and the SNB the following day.

USD weakens as bank crisis continues to unsettle markets

US inflation data came in line with expectations this afternoon, with year-on-year CPI coming down to the anticipated 6%.  

Traders have determined that these figures will likely not be high enough to frighten the Federal Reserve into any drastic policy changes. This cautious sentiment towards hiking rates comes from mixed US non-farm payroll figures on Friday and the recent collapse of Silicon Valley Bank (where the correlating borrowing costs played a major part in its downfall). 

Consequently, the USD has been giving back last week’s gains with Sterling a major beneficiary of these outbound flows. As a result, the GBP/USD has reclaimed nearly 4-cents from this time last week and now trades around a one month high. The Pound is also buoyant against the Euro with the GBP/EUR hitting a 2-week high earlier today.

Traders will carefully be looking towards US retail sales data tomorrow to see if these figures can provide some support or resistance towards the Dollar. In addition, eyes will also look to Thursday to see if the recent ongoings with SVB will have any influence on the ECB’s rate decision. 

Sterling buoyant as USD reverses last week's gains

The USD has just rallied after Federal Reserve Chairman Powell indicated that interest rates are likely to hit a higher peak than previously expected.

He highlighted that the latest economic data has been stronger than expected, particularly in the jobs market and inflation. He stated that if the incoming data continues to indicate faster tightening is warranted, then the Fed will be prepared to increase the pace of rate hikes.

As a result, the odds of a 50bps hike in March are now up to 42%. This has provided instant support to the USD, pushing the GBP/USD to the lowest levels since early January which is down nearly 2-cent from this morning’s high. The EUR/USD has also given back around 1-cent following this speech, which takes it closer to a one month low. 

Later this week, traders’ eyes will move towards the latest US employment stats, including ADP employment change (Weds) and the ever-important non-farm payroll data (Fri). So, it will be interesting to see how these numbers come in and whether they can support this bullish momentum in the USD.

Hawkish comments from Fed Chairman boost the USD

The Pound has strengthened this morning following better-than-expected private sector UK services and manufacturing data.

The PMI composite figure showed a strong rebound this month coming in at 53.0 versus forecasts for 48.7 (and last month’s 48.5). This has reduced the market odds of a near-term recession and a (seemingly) robust UK private sector should give BoE policymakers more confidence in raising interest rates further by reducing fears of this creating a deep recession.

As a result, the GBP/EUR is up nearly 0.9% today and now sits at the highest levels in February. The GBP/USD has recovered nearly 1% since the data release but remains relatively subdued due to the more recent independent strength in the USD. Next up, we have the US PMI figures for services and manufacturing and then Fed Minutes tomorrow night. Then on Thursday we see the latest Eurozone (CPI) inflation and US GDP figures.

Sterling recovers following upbeat private sector data for Feb

Sterling has weakened this afternoon following the latest Bank of England interest rate meeting.

As expected, the Central Bank voted to increase interest rates by 0.5% to 4%, however, this was a dovish rate hike with Governor Bailey striking a cautious tone about the future. The vote was split 7-2, with two members voting for no rate hike at all, and this appears to indicate that the committee are moving closer to pausing their rate hike cycle. Their language also appeared to suggest that if they do hike at their next meeting then it will be a smaller (0.25%) one.

They lowered their inflation forecasts and now expect inflation to move to under 4% by the end of this year (versus previous expectations for 5%). Although they believe the UK recession will be shallower than previously anticipated, they’re still referring to the R-word in their correspondence which contrasts with other major central banks including the Fed and ECB. I guess it’s no wonder as the UK is currently facing some major headwinds including the ongoing strikes, Brexit Northern Ireland Protocol issues, sluggish growth, and negative forecasts from the IMF to name a few.

Across the pond, the USD was sold overnight after the Federal Reserve voted to raise interest rate by 0.25% and Fed Chairman acknowledged the disinflation in goods is picking up. It appears to the markets that the aggressive rates hikes made by the Fed are now seeping into the economy and starting to reflect in prices. In contrast, the ECB are continuing to play catch up on inflation/rate hikes and they’ve just voted to raise rates by another 0.5% (with suggestions they’ll repeat this hike at their next meeting). This has created increased flows out of the USD and into the Euro (but less so into GBP for the above reasons).

As a result, the GBP/EUR hit a 4-month low this afternoon having lost around 2.5 cents from last week. The GBP/USD lost a cent from this morning but still trades around relatively buoyant levels. The EUR/USD touched market levels over 1.10 which represents a 9-month high.

BoE hikes rates 0.5% but hints nearing their peak

Happy New Year!

We hope you had a lovely break and wish you a happy and healthy 2023.  

High volatility in the FX markets continued into the end of 2022 and, even after just a few days of the new year, it appears this theme may continue into 2023.

Last year, as the world began to emerge from the Covid pandemic and Russia started it’s invasion on Ukraine, surging inflation and the consequential unprecedented interest rates that followed took centre stage in global financial markets. Focus is likely to remain on inflation and what impact the aggressive interest rate hikes are having on this and countries economic growth. Only time will tell on how well the major central banks have dealt with this balancing act and we should start to get a good picture over the coming year.

The Russian invasion on Ukraine has had a significant impact on riskier currency assets, such as the Pound. It triggered the major move lower in the GBP/USD which traded comfortably over 1.30; a move lower which ultimately ended in a record low in GBP/USD following the disastrous mini-budget from Liz Truss’ short lived reign as PM. Unfortunately, as things stand, it appears that this war will continue for the foreseeable future, however developments will be closely watched for any signs of peace or escalation and risk assets will act accordingly.

China’s zero-covid policy continued to damage global supply chains and heavily impact on inflation throughout 2022 with whole regions being shut down for extended periods of time. They now appear to be moving away from this policy and opening back up to the world. This should help improve the supply of goods around the world and make a heavy contribution towards bringing inflation down.

Sterling made a good recovery after Liz Truss exited as prime minister with Sunak providing a more stable political environment helping to boost investor confidence in the UK. However, the UK economy remains very fragile with many headwinds (including the cost of living crisis, Northern Ireland Brexit negotiations etc) and the Pound has given back a lot of the ground it made during the first half of December. Traders will be closely watching the key UK economic data releases to assess how well the UK economy is doing and therefore how long they should be on the Pound.  

Across the pond, the US Dollar continues to trade strongly. Last year, we saw the USD largely benefit from risk flows from the Ukraine war and global economic crisis, along with a very hawkish Federal Reserve hiking interest rates to over 4%. On the surface, it seems the Fed’s aggressive response to hiking rates is beginning to pay dividends, as US inflation has seen a retreat in the last two postings and is expected to continue to cool down. Some questions are how much further do the Fed need to go with their rate hike cycle and are they going too far and risking a major pullback in growth. Certainly the employment market in the US seems robust and continues to surprise, with no lack of slowdown taking place in the number of new jobs being created.

Closer to home, the Euro saw a year of large depreciation in 2022 and eventually went under parity against the USD. Like the Pound, the Euro was heavily affected via the Russia-Ukraine war, where we see still see the pipeline embargo bubble away in the background. Furthermore, unlike the US, the ECB reacted quite late to rising inflation in a failed hold-off approach. As a result, their delayed reaction to rising inflation saw prices skyrocket to double figures. However, once the penny dropped with the ECB, they also became aggressive with their rate hikes which helped bring the EUR/USD back over parity and up to around 1.07 at the turn of the year. There’s a good chance that the ECB will have to continue with some heavy rate hikes this year, which might provide some short term support, although the ECB have a fine balancing act to also not rumble struggling growth and delicate peripheral bond markets.

As a result, the GBP/USD now trades around a 6-week low and has lost around 2-cents this week (and around 5.5 cents from December’s high). The GBP/EUR touched around the lowest levels in 3-months and continues to remain subdued around these levels. The EUR/USD trades around a 4-week low after losing around 2-cents from the start of this new year. On the immediate horizon we have US non-farm payroll figures out this afternoon and we will keep you updated on any major news. 

Happy New Year

The Pound has continued its strong recovery against the USD following weaker than expected US data and dovish Federal Reserve minutes.

The latest PMI readings from the US, which is forward-looking data, missed expectations yesterday afternoon which led to another move lower in the Dollar yesterday. This move was amplified overnight following the release of the latest Federal Reserve meeting minutes. Overall, the minutes showed clear dovish tones from the Fed with regards to future interest rate hikes.

Whilst some Fed members proposed waiting on the results of upcoming inflation figures before slowing down hikes, others claimed that continuing to raise rates could become disadvantageous for the US economy by exceeding requirement. However, what was agreed by most members was that “a slowdown in hikes would likely seem appropriate”. After this meeting occurred, US inflation data missed expectations which triggered the current move lower in the USD; these minutes only lend further support to the idea the Fed are nearing the end of their aggressive rate hiking cycle. Consequently, the USD has become less attractive to investors seeking higher yields.

As a result, the GBP/USD has rallied over 1.8% from yesterday’s low and now trades at a 14-week high. The EUR/USD has also continued to climb and has pushed up over 1% from yesterday, which takes it to a 9-day high and not far off the highest levels since early July.

USD continues to soften following latest Fed meeting minutes

The USD has crumbled following the release of softer than expected US inflation data.

US Consumer Price Index readings came in at 7.7% versus an expected 8.0% year-on-year. This is potentially a sign the aggressive rate hikes from the Federal Reserve are starting to take bite on US inflation and traders are predicting the Fed will slow down the pace of their rate hikes. Consequently, we’ve seen a big move out of the USD.

The Dollar has been on a massive rally this year and USD long trades (i.e. buy USD trades) the most-crowded trade in the world. Now, with interest rates getting closer to their expected peaks, the Dollar is particularly vulnerable to any negative data that comes out and today’s data miss is an example of this.

As a result, the GBP/USD has rallied up 2% today and has touched an 8-week high. The EUR/USD has bounced over 1% today and now trades back above parity and at an 8-week high. The GBP/EUR has reclaimed yesterday’s losses and remains at elevated levels. Next up is UK growth data (GDP) out tomorrow morning.

Dollar caves as US inflation misses expectations

The USD has rallied overnight and through this morning following the latest Federal Reserve interest rate meeting.

As widely expected, the Fed announced a fourth consecutive 0.75% rate hike, taking US interest rates up to 3.75-4%, but the accompanying press conference from Chairman Powell was unexpectedly hawkish. Recently, many market analysts had expected the Fed to be reaching a turning point in their aggressive rate hiking cycle, however, Powell stated that they cannot be too premature in pausing rate hikes just yet and signalled that further large hikes may on the cards to subdue the ongoing inflation. This has led to a move back into the US dollar.

In other news, Sterling has lost ground this morning ahead of this afternoon’s Bank of England interest rate decision. Generally, markets have been expecting a 0.75% hike, however, we’ve seen some cautiousness amongst traders this morning and rumours that, due to the stabilisation of the UK political environment, they might opt for a more cautious 0.5% hike instead. Policymakers will also have to wait until later this month to see the Autumn budget from Jeremy Hunt and Rishi Sunak before they can properly adjust their forecast and outlook.

As a result, the GBP/USD is down over 2% from yesterday’s high and now trading close to a 2-week low. The GBP/EUR lost around 1-cent and now trades around a 1-week low. The EUR/USD is 1.5-cents lower from yesterday and also trades close to a 2-week low.

Traders will have a keen eye on the outcome of today’s BoE rate hike decision and importantly the voting pattern and press conference that accompanies the decision. This will provide them with further direction on where to take the Pound. Then tomorrow focus will shift across the Pond to the latest non-farm employment figures out the US.

Dollar rallies as Powell states too premature to pause rate hikes

The USD has weakened heavily over the past 24 hours as investors pull back on their expectations for future aggressive rate hikes from the Federal Reserve.

Although the market still expects another 0.75% hike from the Fed next week, a recent report from the Wall Street Journal suggests that some Fed policymakers have started to consider reducing the pace of hikes from December. Weaker data out of the US on Monday (PMIs) and again yesterday (housing and consumer confidence figures) is only likely to give further justification to Fed members to wind back on their current aggressive hiking cycle.  This has led to a drop in US treasury bond yields and a large sell off in the Dollar.

In other news, the Pound has been supported by the appointment of Rishi Sunak as the new Prime Minister. Whilst this was widely anticipated, particular after Boris Johnson pull out of the race on Sunday, UK assets have generally been buoyed by the news amid improved political certainty and a perceived steady pair of hands. The markets will now await to see the full details of their updated fiscal plans and it’s just been announced that this will now be delayed until the 17th November (from 31st Oct). This might make next week’s BoE meeting less exciting, as they won’t be able to include the government’s fiscal plans into their forecasts and outlook.

As a result, the GBP/USD has bounced around 3-cents higher this week and it now trades around a 6-week high. The EUR/USD has hit above parity again for the first time in 5-weeks and the GBP/EUR is buoyant and trading close to the top of the range we’ve seen over the past couple of months.

The market will now turn their attention to tomorrow afternoon’s ECB interest rate meeting and a raft of US data releases (GDP, durable goods, and jobless claims). The ECB are expected to hike by 0.75%, however it’s likely the accompanying statement and Q/A session from the ECB President will create the most volatility. Watch this space.

USD falters as Fed rate hikes expectations drop. GBP up as Rishi becomes PM

The resignation of Liz Truss as UK prime minister has created another eventful 24-hrs in UK politics which has dominated the recent headlines in FX markets.

Sterling initially moved higher on the news and it had pushed up by more than 1% against the USD at one point. This was seen as a bit of a relief after her disastrous mini- budget a few weeks earlier sent UK financial markets into turmoil. The Pound has since given back these gains as the UK political uncertainty remains with the Tory party starting the search for their new leader which should be announced in a week’s time. Rishi Sunak and Penny Mordaunt are the current front-runners and there’s even reports that Boris Johnson might attempt to achieve another stint as PM.

The markets have also been reducing their Bank of England rate hike expectations as well, which has further reduced the appeal of Sterling. Markets had been pricing in a 1.25% hike for November’s meeting but this has since reduced to barely a 0.75% hike. Further support for these dampened BoE expectations came from this morning’s latest UK retail sales figures which heavily disappointed at -1.5% vs an expected -0.3% month on month (-6.2% vs expected 4.1% year on year). This data suggests that consumers are feeling the pinch from the cost-of-living crisis and high inflation.

As a result, the GBP/USD is down around 3-cents from Monday’s high and currently trades at an 8-day low. The GBP/EUR is down over 2-cents from Monday’s high and also trading around an 8-day low.

Volatility remains in Pound as Truss resigns, BoE dampen expectations, and retail sales disappoint

Sterling has reclaimed its pre-“mini budget” levels this morning after the UK government announced a U-turn on scrapping the 45% income tax rate.

The government have faced major backlash since announcing the largest tax cuts in 50 years which sent UK financial markets into turmoil and the Pound to a record low against the USD. This U-turn is being seen as a potential first step in regaining confidence into the UK markets, which has boosted the Pound this morning.

It’s worth noting, however, that scrapping the 45% income tax band only accounted for £2 billion of the total £45 billion tax-cutting plan. Therefore, it’s likely the markets will still want to see further evidence over how they’re going to fund the rest of their planned tax cuts/stimulus package and that these aren’t over inflationary or damaging to the economy. Otherwise, further changes to their plans may also help stabilise UK asset markets.

As a result, the GBP/USD jumped nearly 2-cents higher from this morning’s low and it now sits around the highest levels since 23rd September. The GBP/EUR is up a cent and also back up to the highest levels since the 23rd September.

Government U-turn on scrapping 45% income tax rate boosts Pound

Sterling has made an impressive recovery over the past 24 hours following the Bank of England’s mid-week intervention which has helped calm financial markets.

The UK government are continuing to stand by their plans, however, Truss/Kwarteng have had an emergency meeting with the Office for Budget Responsibility (OBR) today. The OBR are now expected to announce a timetable for their economic forecasts next week but it appears we won’t get the full fiscal statement/forecasts until the 23rd November when Kwarteng announcing their full plans.

Sterling received a further boost this morning after data showed the UK economy had grown more than anticipated in the second quarter with annualised GDP coming in at 4.4% versus forecasts for only 2.9. Meanwhile, improving market risk sentiment has further enhanced Sterling’s fortunes this morning.

The Euro has also made gains after data showed German inflation unexpectedly spiked into double figures this month (10.9%, first time since WWII) and combined Eurozone inflation hit double-digits this morning (10%). These higher inflation readings have led markets to expect another 0.75% hike from the ECB at their next meeting in October. ECB President Lagarde seemed to set up such a move during her communications earlier this week, saying ‘we will do what we have to do, which is to continue hiking interest rates in the next several meetings’. Therefore, anything less than a 0.75% hike next month would be seen as a massive disappointment.

As a result, earlier the GBP/USD hit 6-cents higher from Wednesday’s low (since settling 1% down from the earlier high). The GBP/EUR has moved over 3.5 cents higher from Wednesday’s low. The EUR/USD has gained 2-cents since Wednesday and continues to trade around a 1-week high. Next up we have some key US inflation data (PCE) out at 1.30pm today.

Pound rebounds as large FX swings continue

The Pound has just been whipped around after the Bank of England announced they would be intervening in the UK government bond market (gilts) to help restore orderly market conditions following the fallout from last week’s mini-budget.

They’ve said they will “temporarily” buy long-dated government bonds at whatever scale is necessary. This has led to a large drop in bond yields and initially there was a very brief move higher for Sterling. However, it quickly dropped lower as traders’ digested the news. The lack of stability and incoherence in the UK financial markets is causing a major lack of confidence for investors, which has caused another move out of the Pound.

The Pound has been in turmoil since Friday’s Kwasi Kwarteng’s mini-budget, which has received major backlash from across different sectors of the financial markets. Overnight, even the International Monetary Fund criticised their plans and raised their concerns it will lead to further inequality between the rich and poor: "Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy".

Markets will be closely watching for any further Bank of England intervention and to see the UK Government’s response to these market developments. The BoE can only do so much and their responses are only likely to be temporary fixes to try and calm the markets. However, for Sterling to make any sustained recovery, it’s likely we will need to see something big from the UK government/treasury to reassure the market of their plans or some kind of U-turn.

As a result, the GBP/USD is back close to the lows we saw early on Monday with the market back into the 1.05s! The GBP/EUR has fallen over 1% today and back to some of the levels we saw on Monday morning. We will keep you updated on this very fluid situation.

BoE intervention on UK government bond market fails to support Sterling

The Pound crashed on Friday afternoon and continued to fall overnight following Friday’s mini-budget from new chancellor Kwasi Kwarteng. This took the GBP/USD to record lows this morning with rates touching into the 1.03s!

In a bid to stimulate UK growth, the chancellor announced the largest UK tax cuts in 50-years, with funding to be made from large increases in government borrowing. Markets have reacted very heavily to this news with many investors believing this package is fiscally irresponsible and will potentially create a balance of payments crisis. The UK economy is already in a debt crisis and borrowing rates are increasingly expensive as the Bank of England continue to raise interest rates to combat spiralling inflation. The government are arguing that the additional boost to growth will outweigh the costs but many investors believe these plans could put government debt on an unsustainable rising path.

This has led to a huge sell off in UK government bonds (gilts), ironically causing the cost of government borrowing to soar, and Sterling has been offloaded. The markets are now waiting to see if the Bank of England will intervene to try and shore up markets and stop the glut in the Pound (as a weaker Pound will only add to inflationary pressures). Therefore, we might potentially see an emergency rate hike from them this week to regain some credibility and show they’re serious about bringing inflation into line.

As a result, the GBP/USD had lost around 9-cents from Friday morning and it hit a record low this morning with levels touching into the 1.03s. It has since recovered around 4-cents as traders take profit from these unprecedented moves and await further updates. The GBP/EUR had dropped around 7-cents from Friday morning, which was around the lowest since the Covid crisis kicked off in Spring 2020, but has since retraced around 4-cents of these losses this morning.

Pound capitulates after Kwarteng's mini-budget

The USD has strengthened this morning as investors seek safe haven assets after President Putin called up reservists for the war in Ukraine and said he will do whatever it takes to defend their ‘Motherland’.

This is a step up in terms of aggression from Russia and has added to concerns that this war will not stop any time soon and that the energy crisis may last longer than previously anticipated. Consequently, the USD has strengthened across the board this morning.  

The markets are also being cautious ahead of tonight’s Federal Reserve interest rate meeting. After last week’s US inflation report (CPI), which came in higher than expected at 8.3%, markets have high expectations in the run-up tonight’s meeting. They’re expected to raise rates by another 0.75%, but some of the market are expecting a bigger hike of 1%. The Fed’s inflation and rate forecasts will be closely watched and this is likely to determine which direction the market take the dollar. However, with expectations already so high, it may take a lot to satisfy the dollar bulls. Watch this space.

Investors eyes will then move onto tomorrow’s postponed Bank of England interest rate meeting. Generally, the markets are anticipating a 0.5% rate hike, but it’s tough to call with various recent development clouding the outlook. In particular, the announcement of PM Truss’s £100 billion energy crisis package and how this affects the BoE forecasts for growth and inflation in the short- to long-term. So, the decision between a 0.5% and 0.75% hike might be closer than expected and therefore we might expect to see some volatility in the Pound tomorrow (particularly when we see how policymakers voted).   

As a result, the GBP/USD touch fresh 1985 lows this morning and trades around 1% lower from yesterday’s high. The GBP/EUR continues to trade at relatively subdued levels and within a narrow range.

USD strengthens as traders seek safety following Putin announcement

Last week, we saw Sterling take heavy blows against both the Euro and the Dollar. The Pound had already been down against these two due to risk aversion supporting the USD and recent ECB hawkishness propping up the Euro, alongside general Sterling weakness following a series of lacklustre UK economic data releases. 

The real hit, however, took place on Wednesday last week when BoE Governor Bailey failed to give any confidence in the outlook of the UK economy, with him suggesting the UK will be in recession for the whole of 2023. Following this, we saw traders reduce the odds of a 75bp hike at the next BoE rate meetingn and expectations are now in favour of a tamer 50bps hike. This, alongside a postponement of said meeting to the following week, failed to give any inspiration to the Pound. Consequently, the Pound traded at a multi-decade low of 1.1405 against the USD on Friday (lowest levels since 1985).

Sterling’s fortunes reversed after the weekend, however, as a positive shift in risk sentiment fuelled a surprise Pound fightback. This pushed the GBP/USD up to 1.17. The Euro also benefitted from this improved risk sentiment and, alongside continued ECB hawkishness, this has led to the Euro closing in towards 1.02 against the Dollar.

It's likely we’ll continue to see this back-and-forth between the Dollar and Pound this week as inflation data takes centre stage again. This afternoon we have key US inflation data and then tomorrow morning we have the UK numbers. Traders will be closely watching how these figures come in against market expectations as it will provide further clues on how aggressive the central banks will be at their future rate-setting meetings. 

Sterling makes recovery after heavy blows

Sterling is buoyant this morning as details emerge on new prime minister Truss’s plans to deal with the cost-of-living crisis.

It was widely expected that Liz Truss would secure the keys to Number 10, with the market largely pricing this in, and therefore the initial market response to yesterday’s announcement was rather muted. Overnight, however, the Pound was lifted after further information was revealed on her plans to stimulate the economy with large tax cuts and a new £130 billion energy plan (over 18mths). This will help support UK households struggling with the cost-of-living crisis and improve UK risk sentiment, but at the same time it could also boost already high inflation. So, in turn this may make it more likely the Bank of England will need to raise interest rates harder and faster than previously expected, which (for now) has lent some support to the Pound. Only time will tell on the longer-term implications of these new policies though and how much they will impact the BoE’s policy outlook moving forward.

Over in Europe, the gas flow embargo unfortunately continues to take place with Russia. In a recent statement, Russian officials have declared that until western sanctions on Russia have been lifted, they will continue to refuse supplying gas to Europe. Consequently, this ongoing risk to European energy supplies continues to provide enduring headwinds for the Euro. The single currency has made some gains recently, however, as more ECB policymakers have begun to lean more towards aggressive rate hikes. In fact, the odds of them hiking by 0.75% at this Thursday’s key ECB meeting have risen dramatically over the past couple of weeks, which had led to Euro recovering back some ground. It’s still up in the air whether they will hike by 0.5% or 0.75%. At this stage, it seems the latter may be more likely but, given the more recent events with Russia, this could be followed by dovish rhetoric from ECB President Lagarde.  

As a result, the GBP/EUR is up around 1.5 cents from yesterday’s low and now trades at a 1-week high. Yesterday, the GBP/USD hit the lowest levels since the mid-1980’s, but it’s moved up about 1% in the last 24hrs. An official announcement on Liz Truss’s fiscal plans is expected on Thursday and we also have the ECB interest rate decision on the same day. 

Pound buoyant over Truss's energy relief plan

Sterling has jostled around this morning after UK inflation hit a 40-year high.

Data showed annual inflation hitting double-digits at 10.1% versus market expectations for 9.8%. This led to a small bounce in the pound, as it justifies more rate hikes from the Bank of England, however this move quickly simmered back down.

Over the past few months, traders have tended to buy a currency with higher-than-expected inflation readings believing it equates to more aggressive central bank interest rate hikes, therefore making it a more attractive currency. However, as central banks appear to be signalling a slowdown in these exceptional rate hike cycles, this pattern of trading might become less clear-cut as traders become more concerned of the adverse impact these huge price rises might have on that economy moving further forwards.

For example, in the UK, the Bank of England have already warned we’re heading into a recession towards the end of this year – with the country gripped in a cost-of-living crisis – and indeed data last week showed negative growth for Q2 (at -0.1%). It’s therefore unlikely the BoE will continue to be as aggressive on rate hikes, as it could lead to a deeper recession. Instead, headlines of inflation hitting over 10% may likely only dampen consumer confidence, which may further damage growth and therefore reduce market expectations on future hikes (possibly with market pricing more into when first rate cuts will be). Therefore, this can go some way to explain why Sterling hasn’t taken off from the back of these numbers and that it’s likely to continue to remain vulnerable to any weaker data releases.

As a result, the GBP/EUR is now trading close to a 2-week high. The GBP/USD remains subdued and trading around the low 1.20s. Next up for Sterling, we have UK retail sales figures out on Friday morning. Across the Pond, we have US retail sales data and the Federal Reserve minutes out this afternoon and this evening respectively.

UK annual inflation hits double-digits

Sterling has fallen this afternoon after the Bank of England painted a gloomy picture of the UK’s economic outlook at their latest rate-setting meeting. 

As expected, they unanimously voted (9-0) to raise interest rates and hiked by 0.5% which takes the benchmark rate to 1.75%. This is now a record six meetings in a row where they’ve raised interest rates in a bid to cool spiralling prices. Their latest forecasts, however, warn of a dire economic outlook where they see inflation peaking at 13% (which would be a 42-yr high) and the UK moving into recession later in the year. They’re anticipating five negative quarters of growth from Q4 this year until the end of 2023 and therefore warning of the potentially longest recession since the global financial crisis of 2008.

The BoE governor Bailey downplayed expectations for a continuation of these aggressive rate hikes, which has caused a downward shift in market interest rate pricing and therefore reduced the appeal of Sterling to investors. They also expect unemployment levels, which has been relatively robust of late, to start to rise from next year. As with the Federal Reserve last week, it appears that future rate hike decisions will very much be taken on a meeting-by-meeting basis and that it will depend heavily on how the economic data is going. For the foreseeable though, it certainly doesn’t feel like the Pound will be getting any further policy tailwinds from the BoE and that it will need to find support from other areas. 

As a result, the GBP/USD has lost a cent following the meeting and now trades at a 8-day low. The GBP/EUR is also down 1-cent and at a 9-day low. So, although we’ve seen a move in Sterling, it’s not been overly dramatic so far. However, this might just be the case the market is waiting to see how tomorrow’s key US non-farm payroll figure comes out before deciding on any potential bigger moves. 

Pound down as BoE warn of trouble ahead

The USD has weakened overnight following the latest Federal Reserve interest rate meeting.

Although they decided to hike interest rates by another whopping 0.75%, in a bid to calm surging price levels, this was largely priced in and therefore hasn’t lent further support to the dollar. In fact, the dollar weakened following a subtle shift in the tone and comments from Fed Chairman Powell in the accompanying speech.

He said they wouldn’t be giving any more forward guidance on the rates and that decisions would now be based on a meeting-by-meeting basis subject to the data. This has given traders the impression that we might not be seeing such large hikes in US interest rates in the future (e.g. less chance of 0.75% in Sept), which has disappointed some dollar bulls. Obviously, this is not guaranteed as the data may continue to warrant a continuation of these unprecedented hikes, but it was enough to trigger a dollar sell back from investors. Furthermore, when questioned about the market starting to price in rate cuts for 2023, he chose not to push back on this and instead just said it’s notoriously difficult to predict rates 6- to 12-months out.

As a result, the GBP/USD rate is up 2-cents from yesterday’s low and now trades at a 4-week high. The EUR/USD has gained around 1-cent from yesterday but continues to trade at subdued levels and at a 2-day high. The GBP/EUR has continued its steady recovery, having clawed back around 4-cents this month, and now trades at a 3-mth high.

As above, US economic data releases will now take even more attention from investors and this afternoon we have important US growth, jobless, and consumer spending figures.

Dollar weakens as Fed paves way for a slow down in hikes

The Euro has just strengthened after the European Central Bank (ECB) raised interest rates for the first time in 11-years.

Markets were expecting a small raise of 0.25%, however they made a larger hike of 0.5% which has boosted the Euro and pushed it higher across the board. The ECB have been very cautious over raising rates since inflation levels spiralled around the world and clearly they now feel they cannot just leave inflation to continue as it is.

The ECB also announced a new anti-fragmentation tool called the “Transmission Protection Instrument (TPI). This new tool is described as “safeguarding the smooth transmission of its monetary policy stance throughout the Euro area”. We are yet to see any real detail on this tool and it may well have been pushed through quicker due to the current political events in Italy. So, we shall see what the market make of this once they have further details on it.  

As a result, GBP/EUR dropped nearly 1-cent and currently sits at a 2-week low. The EUR/USD is up around 1-cent on the day and trading around a 2-week high. All eyes are now on President Lagarde’s current press conference where investors will be listening for more information on this new TPI tool and their general outlook.

ECB raises rates for first time in 11 years

The Office for National Statistics reported that headline Inflation data (CPI) rose to 9.4%, a forty year high for the UK. The monthly figure showed that the UK CPI rose 0.8% in June, above the expected 0.7%. However, the core inflation gauge, eased to 5.8% Year on Year in June from the 5.9% booked in May. This caused a brief uptick on GBP/USD, but the spot prices retreated quickly, now the Pound is back hovering around the same resistance levels.

On Thursday, markets anticipate that the European Central Bank will raise interest rates by 50 basis points. This is providing solid support for the Euro, enabling the EURO/USD levels to move away from last week’s parity. If the ECB do decide to raise rates by 50bp, rather than the more sedate 25bp, this could potentially cause some volatile moves. The ECB are notoriously cautious, and they have not raised interest rates at all since 2011.

The European Commission warned on Tuesday that the Nord stream one gas pipeline between Russia and Germany may not open after the planned maintenance ends on Thursday. If this happens, then the sweeping optimism surrounding the Euro may diminish quickly.

The USD rally over the last week has been largely fuelled by market anticipation that the Federal Reserve cold raise interest rates by 100 bp at their July policy meeting. This week, market sentiment has retreated amid diminishing odds and several FOMC members suggesting that they will stick to a 75bp rise in July.

As a result, GBP/USD is 1.6% higher than a week ago and GBP/EUR is (despite a brief dip yesterday) at a 2 week low.

UK inflation at a 40 year high

Sterling has made back some ground on the USD today, as traders pull back on their US rate hike expectations and market risk sentiment improves.  

Last week, the dollar rallied heavily – hitting two-decade highs – after traders started to dramatically price in a giant 100bps hike for the Fed’s next interest rate meeting. Before last week, forecasts were for another 0.75% hike but by last Thursday this had shifted all the way up to a 90% chance of a 1% hike. However, bets on such an aggressive move from the Fed have now slowed (to below 30% chance) and forecasts have now realigned back towards a 75bps hike instead.

In the UK, with political drama still at full swing, there is still an overall cautious mood surrounding the Pound and we can expect traders to keep an eye on how the leadership votes play out over the coming days. Market risk appetite is still one of the main drivers of Sterling though and today’s boost in market mood has lifted the Pound across the board.

It’s a busy week over in the Eurozone starting with tomorrow’s key inflation data (CPI). Analysts are expecting year-on-year inflation to remain at 8.6% and traders will be closely watching for any divergences on this for further clues on how the ECB might vote at Thursday’s interest rate decision. Previously, the ECB have remained dovish towards rate hikes, with rates remaining at -0.5%, whilst their global counterparts have all heavily increased their rates in a bid to coo rampant levels of inflation. There is a split outlook from the ECB on whether inflation is high enough to justify hikes, which could potentially lead to a deep recession, or whether by not acting aggressively on inflation now it could lead to it spiralling further out of control. So, all eyes will be on the CPI data release tomorrow morning, as any data that falls out of line with expectations could have large impact on Thursday’s rate decision.

As a result, the GBP/USD has risen around 1.2% this morning, which is around 2-cents higher from Thursday’s low but still only trading at a 1-week high (and below the 1.20 mark). The GBP/EUR is up around 0.5% and remain buoyant, albeit within a relatively tight range. The EUR/USD has regained around 1.5-cents, after trading below parity last Thursday, and now trades at a 1-week high.

USD loses ground as rate hike expectations realigned 

Sterling is having an extremely choppy day today following the latest Bank of England interest rate meeting.

As widely anticipated, they raised interest rates by 0.25% (to 1.25%) and there were three dissenting policymakers voting for a 0.5% hike. Leading into the decision, however, some traders started to expect that a larger 0.5% hike was on the cards (after large hikes from Fed and the SNB) which led to a large rally in the pound pre-decision. Then we saw an immediate drop back as the 0.25% was confirmed. However, after further digestion of the meeting, traders then took it back the other way with Sterling climbing back towards the highest levels of the week!

The accompanying statement from the BoE showed that inflation is expected to be over 9% in the next few months and is expected to rise to above 11% by October. The Bank said that they will take the ‘necessary actions’ to return inflation to their 2% target but the scale, pace, and timing of any rate hikes will reflect the assessment of the economic outlook and inflationary pressures. So, although the BoE are taking a steady approach at the moment, the money markets are expecting them to be more aggressive later in the year, which has caused Sterling to be bought back (for now).

Last night the US Federal Reserve raised interest rates by 75 basis points – the largest hike since 1994. Chairman Powell suggested that a further 75 basis point rise would happen in the July meeting, although he did say that he didn’t expect further moves to be common following that. This decision has contradicted previous statements that they were not considering such a large hike, however, following May’s inflation report, the Fed were forced to show it was working to control rising prices. 

As a result, the GBP/USD is up nearly 2-cents from the low we’ve seen today and trades at the highest levels since Monday morning. The GBP/EUR is up over 2-cents from yesterday’s low and hit the highest levels of the week earlier.

Volatile day for Sterling as BoE hike as expected

The Pound has continued its descent this week as market risk sentiment sours and data points towards a slowdown in the UK economy.

Figures on Monday showed the UK economy contracted further in April (-0.3%), which was against expectations for a slight expansion (+0.1%), and industrial production data also showed weakness. Yesterday, unemployment data – an area which has shown resilience over the year – showed the jobless rate rising to 3.8% versus expectations for 3.6% (and against previous 3.7%). Together these figures may give the Bank of England further reason to be cautious over hiking interest rates too aggressively, which has reduced the appeal of Sterling. We see the conclusion of their latest interest rate meeting tomorrow afternoon, with market consensus expecting a small 0.25% hike. Investors will be closely watching how the policymakers vote and the latest forecasts for UK growth and inflation.

Market expectations for an aggressive 0.75% rate hike from the Federal Reserve tonight have dramatically ramped up since last Friday’s high US inflation reading. Even earlier this week the market was pricing in around a 25-30% chance but this is now almost fully priced in. This shift in expectations has made the USD more attractive to traders seeking higher yields but also to those seeking the safety of the Dollar, as concerns grow of global recessions caused by rising prices and aggressive rate hikes. With Fed expectations so high, it seems they would need to hike by 0.75% (or more) and be ultra-hawkish on top to keep the Dollar bulls satisfied. Anything less than 0.75%, or if their future rate hikes forecasts undershoot expectations, then we might see a dramatic correction.

As a result, the GBP/USD has hit below the 1.20 for the first time since the Covid-19 pandemic (March 2020). Since Friday’s US inflation data, the pound has lost around 3-cents against the US Dollar. The GBP/EUR has also succumbed to this latest round of Pound weakness and it’s down around 3 cents from last week’s high and trading around a 13-mth low. The EUR/USD is down over 3-cents from last week’s high and trading in the 1.04s which is a 4-week low.  

Tonight’s Fed meeting should set up the direction of the GBP/USD for the week, although tomorrow’s BoE meeting could also throw in some additional volatility. UK politics is also being carefully followed with Brexit issues and a potential Scottish independence referendum seemingly back on the close agenda.

Pounds falls as risk sentiment sours ahead of Fed meeting

The US dollar has rallied this afternoon after US inflation figures came in higher than expected.

The data showed a year-on-year increase in US prices of 8.6% versus an expected 8.3%, and a whopping 1% month-on-month. This has pushed up interest rate forecasts for the US, with the market now expecting base rates to be at 3% by the end of this year. This is the last major data point before next week’s Federal Reserve interest rate meeting and it has led to increased demand for the USD. It’s worth noting that US petrol prices touched new highs yesterday, so further price rises look to be coming down the line, which is only going to give the Fed further headaches.

Yesterday the ECB said they were likely to raise rates by 0.25% in July, which would be their first rate rise since the pandemic began. However, they didn’t give markets confidence they would hike by another 0.5% at their September meeting which, along with downgraded growth forecasts, caused the Euro to lose ground. There’s a lot of concern that central banks are going to hike interest rates up so much that it will tip their economies into recession, but with such spiralling prices (and having to play catch up) their hands are being forced. The Eurozone economy could be particularly vulnerable to this as it might trigger another sovereign debt crisis, particularly with the more indebted economies in the Bloc.

As a result, the GBP/USD has fallen nearly 1.35% today and trades at a 3-week low. The EUR/USD has fallen 2-cents from yesterday’s high and now trades at a 3-week low. The GBP/EUR continues to trade within a relatively tight range (roughly 1-cent range).

Next up we have UK growth data on Monday and the all-important Federal Reserve and BoE interest rate meetings next Wednesday and Thursday respectively. So, things could remain volatile well into next week. 

US dollar rallies as inflation continues its rampant rise

The Pound has bounced back this morning following better than expected employment data and improved risk sentiment.

Data showed the UK unemployment rate dropping to 3.7% versus an expected (and previous) 3.8%. Furthermore, there were less people than expected claiming jobless benefits (-56.9K vs expected -38.8K) and average earnings data showed an increase from previous data sets. Together these figures indicate the UK jobs market is still holding up well despite the Bank of England’s fears of upcoming economic growth issues, which has increased the demand for the Pound this morning.

Sterling has also been supported by an increase in risk appetite with stock markets making good ground back and safe-haven currencies (such as the USD) being sold. After all the deleveraging over the past month, it seems the markets are letting off a bit of steam with some risk flows returning. The trigger for today’s change in risk sentiment appears to be an announcement from Shanghai that no new covid infections were found across the region and that their lockdown measures will be removed by the end of the month, which is positive for global trade/inflation.

As a result, the GBP/USD is up around 2.5 cents from yesterday’s low and now trades at a 12-day high. The GBP/EUR has gained 1-cent this morning and is up around 3-cents from last week’s low and close to a 2-week high.

Market risk sentiment is likely to be the dominant driver of the rates but there’s also some key data releases still to come this week. We have US retail sales figures this afternoon, UK inflation figures (CPI) tomorrow morning (expected 9.1%) and then UK retail sales on Friday morning.

Pound rallies following robust job figures and positive risk mood

The GBP/USD rate has hit a 2-year low today as market risk sentiment sours and UK growth figures miss expectations. 

Increased fears over heightened global inflation levels amid China’s zero-Covid policy and the ongoing war in Ukraine are causing a flight to safety by investors. They’ve been seeking so-called ‘safe-haven’ assets (such as JPY and USD) and offloading perceived riskier ones (such as stocks and Sterling). Data on Wednesday showed US inflation (CPI) hit above estimates at 8.3% in April, and the European Central Bank have also been signalling increased concerns. 

UK growth data (GDP) out this morning showed quarter-on-quarter growth of 0.8% versus an expected 1%. This vindicates the negative outlook portrayed by the Bank of England last week and increases concern there could be a recession in 2022, which is keeping Sterling on the backfoot. UK manufacturing and industrial production figures, also released this morning, showed a 0.2% contraction from the previous month. Furthermore, concerns over the Brexit Northern Ireland Protocol have been coming to the surface again with the UK threatening to revoke it and the EU stating they’re ready to suspend the whole Brexit deal if they do so. 

As a result, the GBP/USD has continued its descent and has given back around 2-cents from yesterday’s high (now trading at a 2-year low!).  The EUR/USD has lost over 1% from yesterday’s high and now trades at a 5-year low! The GBP/EUR continues to trade at subdued levels and around the lowest levels we’ve seen this year. Next up we have US producer price index figures out this afternoon which could impact the USD, however, on its own this figure is unlikely to change the bigger picture and traders’ minds about the inflation outlook.

USD at multi-year highs as market seeks safety over inflation fears

The Pound has tumbled this afternoon following the latest Bank of England interest rate meeting.

As expected, they raised interest rates by 25 basis points to 1%, however their accompanying comments displayed heavy cautiousness. Their forecasts point to a sharp contraction of almost 1% in Q4 of 2022, after further increases in energy prices, and a small fall in GDP in 2023 with unemployment expected to rise to 5.5% over the next 3 years. Although the release of the minutes initially led to a Pound rally, as 3 members voted for a 0.5% increase, further examination of the meeting led traders to pull back on their rate hike expectations and consequently sell the Pound.

In other news, the Federal Reserve raised rates by 0.5% last night – the largest increase in 20 years. This had been priced into the rates and Chairman Powell appeared to water down market expectations for more aggressive action, which initially led to dollar weakness. Overnight this quickly evaporated though, as markets shifted their attention to the Bank of England meeting.  

As a result, the GBP/USD rate has lost nearly 2% today and now trades around the lowest levels since July 2020.  The GBP/EUR is down around 1.25% today and at a 4.5 month low.

Pound falls as BoE paint dire picture of UK economy


Sterling has weakened this morning after disappointing UK retail sales figures and weaker than expected services sector data.

Retail sales dropped by 1.4% month-on-month in March which is a significantly larger fall than economists had expected (-0.3%). On an annual basis retail sales only rose 0.9% which missed expectations for +2.8% and is a major drop from February’s 7.2% increase in retail sales. Although this morning’s services PMI data was still in positive territory at 58.3, it also fell short of expectations for 62.6.

Together these pieces of data are adding to concerns that a slowdown in the UK economy is underway, as spiralling prices and energy costs appear to be creating a deepening cost-of-living crisis in the UK, which has caused traders to dump the Pound this morning. The Bank of England governor is due to speak later this afternoon, but, given his more recent pessimistic comments, it seems unlikely he’ll throw sterling any meaningful support anytime soon.

As a result, we’ve seen a large drop in the GBP/USD of around 1.2% today, which takes it to the lowest levels since November 2020. The GBP/EUR has fallen over 1-cent this morning and now trades at a 2-week low. There are no important data releases on the UK calendar next week, so Pound sellers will be hoping for some weaker figures out of the US and Euro-zone which both have key growth (GDP) data releases. Finally, market risk appetite will continue to be a major driver of the rates and developments in Ukraine will continue to affect this.

Sterling drops following poor retail sales figures

Sterling has remained relatively unfazed after UK inflation data showed the highest rise in prices in 30-years.

Data showed prices rose 7.0% year-on-year in March, up from 6.2% in February and above forecasts for 6.7%. Prices have been rising sharply since the pandemic hit supply chains, shipping costs and energy prices. A jump in fuel prices since the Ukraine conflict started has made a large contribution to these elevated levels and the concern is that this data does not yet reflect the average 54% increase in home energy prices that started from 1st April.

As such, this data makes it likely the Bank of England will continue with their rate hike cycle to attempt to cool price levels. There are major concerns that these spiralling prices are likely to tip the UK into recession as households struggle to pay their bills and consumer spending on non-essential goods/services drops off. The BoE certainly have a difficult challenge to get prices under control but also to not limit our fragile recovery from the pandemic. Markets are still fully expecting them to raise rates again at next month’s meeting though.

In other news, the Euro has weakened as hopes have faded on an imminent resolution to the war in Ukraine. Yesterday, President Putin stated that peace talks had reached a ‘dead end’ after Ukraine’s claims of war crimes by Russia and that Russia hadn’t yet met its ‘noble’ aims in the country.

As a result, the GBP/USD hit the lowest levels since late-2020 and remains at very subdued levels. The GBP/EUR trades towards the top of its range and over 1% from its April lows. The EUR/USD continues to struggle and trades around the lowest levels since May 2020. Markets will look towards tomorrow’s ECB interest rate meeting to see if President Lagarde can lend some support to the Euro or not.

Sterling unfazed by 30-year high in UK inflation

The Euro has rallied this afternoon after the latest round of Ukraine/Russia peace talks showed some progress.

Today Ukraine have proposed a new security guarantee which potentially increases the chances of them adopting a neutral status (in regards to NATO). It would include not joining NATO and not having any foreign military bases in Ukraine and they would have security guarantors in place to protect the security of the nation (possibly from Israel, Turkey, Canada etc).

Ukraine negotiators have implied that enough progress was made in the talks for an in-person meeting between Putin and Zelensky. Although Russia have not confirmed they agree with this, they have confirmed that the latest talks were “constructive”. Furthermore, Russia have also announced they will severely downsize their military activities around the Kiev area.

As a result, there’s been an increase in market risk appetite which has caused movement out of the USD and into the Euro and other risk currencies. The EUR/USD has risen over 1.2% today and is currently trading at a 12-day high and close to its March high. The GBP/EUR is down 0.75% today and trading at a 12-day low. The GBP/USD has moved 1-cent high today but is only trading around 1% higher than its November 2020 levels.

The market will continue to dissect these talks and look for further comments around a peace deal. More optimism could lead to further USD losses and Euro/GBP gains.

Euro rallies following "constructive" Ukraine-Russia talks

The Pound has lost its overnight gains today following the latest Bank of England interest rate meeting.

As anticipated, the BoE raised interest rates for the third time in four months (by 0.25%) which takes the rate back to its pre-pandemic level (0.75% - March 2020). The decision comes as inflation continues to rise with the Bank now expecting inflation to hit around 8% in the second quarter. The invasion of Ukraine is only likely to exacerbate the issue with global supply chain disruptions and further increases in energy prices.

Immediately after the announcement, the Pound came under increased selling pressure due to the cautious tone in some comments from the policymakers as to the path on future hikes and because one member voted against the increase. Generally, this wasn’t expected, and traders have consequently pulled back on their rate hike expectations which has reduced the appeal of Sterling.

In other news, and as expected, the Federal Reserve raised interest rates for the first time since the pandemic struck the world (0.25% increase). This led to some Dollar weakness overnight and into this morning as some traders had been pricing in a more aggressive first hike (of 0.5%). The current crisis in Ukraine has led to some cautiousness amongst Fed policymakers.

As a result, GBP/USD fell 0.75% from opening day levels and GBP/EURO fell 0.7% from its opening level.

UK interest rates back to pre-pandemic levels

The Euro has failed to hold onto the gains it made at yesterday’s ECB interest rate meeting as a market risk-off mood dominates again over rising inflation fears and a potential protracted Russia-Ukraine war.

The Euro took a positive turn after the ECB announced they would end quantitative easing sooner than previously planned. This would open the door to higher interest rates in the Eurozone faster than anticipated (expectations now for 0.4% of rate hikes in 2022 vs 0.3% before the meeting). President Lagarde’s press conference was also bullish, stating the economic recovery was boosted by lower Covid cases and an upbeat labour market.

Nevertheless, the Euro gains were relatively short-lived against the USD as data showed US inflation hit a fresh multi-decade high in February (7.9%) and after Ukraine/Russia peace talks failed to make any progress. Furthermore, the conflict seems to be escalating with fighting intensifying and spreading to new areas of Ukraine. This has led to a renewed demand for safe-haven assets such as the USD.

Sterling has weakened on the back of this risk-off environment, despite the fact we saw the release of stronger than expected UK growth figures this morning (GDP at 0.8% vs. 02% expected). The Bank of England have a very difficult task of trying to manage rising price levels whilst sustaining the economic recovery from Covid; a task that has only been made more difficult from the Ukraine/Russian war.  

As a result, GBP/USD is trading at its lowest level since November 2020. The GBP/EUR had touched a 1-mth low but has since edged a little higher this morning. The EUR/USD has seen some large swings over the past 24hrs but currently trades at subdued levels and below 1.10.

Risk-off sentiment boosting appeal of the USD

The financial markets continue to be concerned over the ongoing Russia/Ukraine war and the potential negative impacts a protracted conflict might have on the global economy and inflation.  

Yesterday a third round of talks between the two nations failed and a full ceasefire continues to be out of sight. Russia have said they would immediately stop their military campaign if Ukraine agreed to their list of demands which includes acknowledging Crimea as Russian territory, conceding separatists regions (such as Donetsk/Lugansk) as independent states, and agreeing to remain neutral (i.e., forbidden to join Nato).

Investors have continued their flight towards safe-haven assets and in the currency markets there’s also been a clear move towards energy exporting countries over net energy importers. Consequently, the Euro has lost a lot of ground due to the region’s heavy reliance on Russian gas and oil imports (e.g EU gets 40% of its gas from Russia vs the UK’s 5%). Traders are also concerned that a slowdown in Eurozone economic growth is going to delay the ECB from normalising monetary policy (i.e. rate hikes potentially pushed further out), which has reduced the appeal of the Euro.

Some technical analysis would suggest the Euro has moved into oversold territory; however, the fundamental view shows that the shared currency might struggle to stage any major short-term resurgence without an imminent end to the military conflict (or major shift in market risk appetite). This morning Russia have threatened to close its main gas pipeline to Germany should the West impose a ban on Russian oil. The EU are reportedly looking into cutting their Russian gas imports by two thirds over the next 12-mths. However, on a more risk-positive note, Bloomberg have just reported that the EU were looking into holding a massive joint bond sale to raise funds for increased energy and defence spending.

As a result, the EUR/USD is trading around the lowest levels since May 2020 and the GBP/USD around the lowest levels since November 2020. The GBP/EUR had hit the highest levels since before the 2016 Brexit vote and remains buoyant.

The markets will continue to closely monitor how things develop with the Ukraine/Russia conflict. Thursday’s talks in Turkey between the Russian and Ukraine Foreign Ministers will be a key focus, along with the European Central Bank interest meeting on the same day.

Risk aversion continuing to dominate markets

Financial markets have been rocked this morning following news that Russia has launched an attack on Ukraine. 

The Russian President announced an invasion of Ukraine this morning and there’s news of multiple explosions across the country. This has triggered a flight-to-safety for investors, leading to them seeking traditional safe-haven assets such as gold, USDs and Japanese Yens. At the same time, perceived riskier assets have been hit and large losses have been seen across global stock markets. 

Earlier this week, we saw many EU countries take sanctions against Russia, in addition to the UK government sanctioning five of their major banks. The markets are now awaiting the West’s response to this latest aggression. Although there’s been no official statement from the UK government, the EU is reportedly preparing the "harshest package of sanctions ever implanted”.  

If matters continue to escalate, we can expect this risk aversion to continue sweeping the markets. If Russia decide to limit their action and instead seek a diplomatic solution, then we’d expect a risk rally. In the short term, however, the latter seems unlikely and the risk-off market profile might persist until some resolution can be found.

As a result, the GBP/USD has lost nearly 2-cents from yesterday’s high and now trades at the lowest levels in over 3-weeks. The EUR/USD is down 1.5-cents from yesterday’s high and trades at a 3-week low. The GBP/EUR is very choppy but currently trading at elevated levels. 

Traders will be staying tuned for any updates on this very fluid situation which is set to dominate financials markets for the foreseeable short term future.   


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