Sterling finds some support ahead of next central bank meeting
Friday 27 May, 2022
Daily Currency UpdateThe pound received modest support yesterday post the announcement that Rishi Sunak, the UK’s chancellor, unveiled a £15 billion support package for UK households in the face of the rising cost of living. These measures by the Treasury should in theory allow Andrew Bailey and his peers in the Bank of England to focus on fighting inflation, putting less pressure on the central bank to worry about the impact of raising interest rates on UK households. However, the market is already forecasting the BoE to raise rates up to potentially 2% by the end of this year, and thus it may take something significantly more aggressive in regard to rate hikes for the pound to find further momentum. Instead, any deviation which lowers market expectations for interest rate hikes could send the pound lower again.
Key MoversThe US dollar has been lagging this week and it looks set to end the week with back-to-back weekly losses for the first time this year. With renewed risk sentiment returning to the market, the US dollar has been on the back foot over the last two weeks. US data continues to impress with initial jobless claims coming in better than expected at 210,000 versus expectations of 215,000. However, US GDP data suggested that it isn’t all plane sailing, coming in slightly worse than expected at -1.5%, and worse than the previous reading. This poses some concerns ahead of the next US Federal Reserve meeting. Its widely thought that the central bank will likely continue on its path of aggressive tightening of monetary policy. Whether the central bank may have to rethink its strategy with lagging US data could be weighing on the US dollar at the moment. Yesterday saw a bank holiday for some European countries and hence data has been very light. However, a couple of European Central Bank members spoke and stated that ‘inflation will gradually slow down towards the 2% goal. With this, the Asset Purchasing Programme should end by Q3 and a hike in interest rates should follow soon after. The process of increasing rates should be gradual. We don’t have a predetermined normalisation guideline.’ This proved to be a slightly less hawkish (aggressive) tone than we have been used to from the central bank in recent times, which could lead to some possibility of euro weakness in the next few days.
- GBP/EUR: 1.1685 – 1.1790 ▲
- GBP/USD: 1.2545 – 1.2665 ▲
- EUR/USD: 1.0685 – 1.0760 ▲
- GBP/AUD: 1.7580 – 1.7780 ▲