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Interest rate rise speculation supports the pound

GBP - British Pound

The end of September proved a very tough month for the pound, as the deepening energy and fuel crisis in the UK weighed heavily on the pound. However, with this came the following impact of rising inflationary pressure, and with it the pound has started to rise again.

The UK's inflation rate hit 3.2% in August, significantly higher than the Bank of England's target of 2%. The question remains whether this rise is a short term phenomenon as a result of post COVID-19 and Brexit supply chain issues, or a longer term concern. As such, the market remains unsure about the Bank of England's next move, with some investors suggesting the Bank of England may even increase rates as early as November. GBPUSD trended higher towards 1.3650 yesterday, but has already broken below 1.36 and is heading back towards the mid 1.35's. This suggests the market remains highly uncertain about the Bank of England's next move.

Key Movers

US President Joe Biden travelled to Michigan on Tuesday to broadcast the benefits of his huge social spending package for many Americans, while lawmakers in his Democratic Party back in Washington debated its price tag.

U.S. services industry activity nudged up in September, but growth is being restrained by a persistent shortage of inputs and the resulting high prices as the pandemic drags on.

US September ISM services index is 61.9 vs 60.0 expected. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index falling to 60.

All eyes are now on Friday’s non-farm payroll data, and it will be this that could drive the US dollar's next move. A strong result here could suggest that the Federal Reserve has backing to start normalising its monetary policy, by tapering its asset purchase program and hiking interest rates. A much weaker than expected reading however could suggest that any move from the Federal Reserve could be deemed as too soon, as the economy still needs time to recover from the pandemic.

Expected Ranges

GBP/USD: 1.3510 - 1.3590 ▼

GBP/EUR: 1.1710 - 1.1765 ▼

EUR/USD: 1.1530 - 1.1610 ▲

GBP/AUD: 1.8620 - 1.8865 ▲