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).
