The Pound hits one year high as inflation remains elevated
Daily Currency Update
This week in Europe there was a sharp decline in the Germany ZEW survey, a measure of economic sentiment, raising fears over the outlook for Europe's largest economy. The survey declined to 41.8 from a previous print in May of 47.5. However the single currency has managed to remain firm in the face of weaker data.The Pound hit its highest level in a year as inflation data released yesterday remains stickily high reducing the chances of a rate cut later this Summer. Adding to the Pounds strength this week the International Monetary Fund, IMF, raised its estimate of U.K. economic growth to 0.7% from 0.5% previously. At the heart of the Pounds strength though is the belief that UK rates will remain higher for longer than other Central Banks.
The US Dollar traded lower through this week despite better than expected retail sales data. Markets are now fully expecting the Federal Reserve to cut rates in August this year which is weighing on the Dollar. Policymakers in the US have repeatedly said that further rate cuts will be data dependant but have quietened in recent weeks fuelling speculation that rates may fall faster than previously expected.
Key Movers
Today's market focus is on the ECB's decision regarding interest rates, with expectations that rates will remain unchanged. However, market participants are keenly awaiting guidance on a potential rate cut in September, which is widely anticipated. After maintaining a restrictive interest rate policy for the past two years, ECB council members are now expressing confidence that inflation will reach their 2% target by 2025.Meanwhile, the British Pound has managed to recover all its losses since the Brexit referendum in June 2016 on a trade-weighted basis. Despite this recovery, the fiscal challenges for the UK persist, with public debt projected to exceed 100% of GDP. The new government's inability to raise taxes or cut spending further complicates the fiscal situation, suggesting that additional gains for the Pound might be challenging.
In the US, the Dollar is expected to remain weak in the near term. This follows comments from Fed Chair Jerome Powell indicating that further cooling of wage inflation is "unwelcome," which markets interpreted as a signal that the Fed is poised to start cutting rates this summer. Additionally, political uncertainty is adding pressure on the Dollar, with the increasing likelihood of Donald Trump's re-election in November contributing to this sentiment.
Expected Ranges
- GBP/USD: 1.2975 - 1.3025 ▼
- GBP/EUR: 1.1870 - 1.1920 ▼
- GBP/AUD: 1.9265 - 1.9320 ▼
- EUR/USD: 1.0905 - 1.0960 ▼