Markets breathe easier as Trump hedges on Iran-Israel conflict.
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Daily Currency Update
The European Central Bank will keep doing all that is necessary to complete its nearly accomplished mission on inflation, one of its top policymakers, Bundesbank President Joachim Nagle, said yesterday. Data this week showed inflation fell to an annualised rate of 1.9% in May from 2.2% in April. Fellow policymaker, Fabio Panetta, said that inflation would undershoot the ECB’s 2% target rate for “an extended period of time”. The ECB have also signaled a pause in easing rates this month despite the dampening effect on price growth of the stronger euro and higher oil prices.Bank of England Deputy Governor, Clare Lombardelli, said on Thursday that British services price inflation, a key measure of domestic price pressures, remained “sticky” despite data showing a slight fall in May. Lombardelli, who was also speaking after the Bank of England left interest rates unchanged yesterday said that a slowdown in the UK’s labour market is expected. “We have seen a rise in most measures of inflation with services data especially sticky but added that higher energy prices have contributed to this.”
While oil importing countries won't fully escape a hit in the event of another energy price shock over Middle East tensions, this period of sustained dollar weakness will soften the blow considerably for countries outside America. Crude (WTI) prices are denominated in US dollars so when the price of oil ramps higher during periods of dollar strength the pain is compounded for regions like Europe. The fact that the dollar has weakened close to 10% this year has hugely cushioned the blow for oil importing countries.
Key Movers
ECB policymaker, De Guindos, said that growing global uncertainty has held back investments and could damage job creation. As a result the Governing council will stick to a meeting-by-meeting, data dependent approach when they consider monetary policy. Nagel, however, stressed that bringing Eurozone inflation down to their 2% target was the very best thing the ECB could do to promote economic growth. He added that this lays the ground for politicians to do the rest.Bank of England Governor, Andrew Bailey, said that interest rates remain on a gradual downward path. He added that “the world is highly unpredictable and in the UK we are seeing signs of a slowing labour market and will be closely watching how this feeds into consumer price inflation”. Bailey also noted that “rising tensions in the Middle East did not factor into their decision to leave the benchmark interest rate unchanged yesterday but that they will be monitoring developments.
Fed chair, Jerome Powell, said that interest rates are likely to continue lower through the rest of this year but warned on putting “too much weight on that prediction. No-one holds these rate paths with a great deal of conviction and everyone would agree that they’re all going to be data-dependent”. In a veiled swipe at President Trump he added that if not for tariffs, rates may have been lowered this week given a softening inflation outlook in the US. Markets are pricing in two 25 basis point cuts by year-end.
Expected Ranges
- GBP/USD: 1.3470 - 1.3520 ▲
- GBP/EUR: 1.1680 - 1.1730 ▲
- GBP/AUD: 2.0755 - 2.0805 ▲
- EUR/USD: 1.1485 - 1.1535 ▲