Sterling has made back some ground on the USD today, as traders pull back on their US rate hike expectations and market risk sentiment improves.

Last week, the dollar rallied heavily – hitting two-decade highs – after traders started to dramatically price in a giant 100bps hike for the Fed’s next interest rate meeting. Before last week, forecasts were for another 0.75% hike but by last Thursday this had shifted all the way up to a 90% chance of a 1% hike. However, bets on such an aggressive move from the Fed have now slowed (to below 30% chance) and forecasts have now realigned back towards a 75bps hike instead.

In the UK, with political drama still at full swing, there is still an overall cautious mood surrounding the Pound and we can expect traders to keep an eye on how the leadership votes play out over the coming days. Market risk appetite is still one of the main drivers of Sterling though and today’s boost in market mood has lifted the Pound across the board.

It’s a busy week over in the Eurozone starting with tomorrow’s key inflation data (CPI). Analysts are expecting year-on-year inflation to remain at 8.6% and traders will be closely watching for any divergences on this for further clues on how the ECB might vote at Thursday’s interest rate decision. Previously, the ECB have remained dovish towards rate hikes, with rates remaining at -0.5%, whilst their global counterparts have all heavily increased their rates in a bid to coo rampant levels of inflation. There is a split outlook from the ECB on whether inflation is high enough to justify hikes, which could potentially lead to a deep recession, or whether by not acting aggressively on inflation now it could lead to it spiralling further out of control. So, all eyes will be on the CPI data release tomorrow morning, as any data that falls out of line with expectations could have large impact on Thursday’s rate decision.

As a result, the GBP/USD has risen around 1.2% this morning, which is around 2-cents higher from Thursday’s low but still only trading at a 1-week high (and below the 1.20 mark). The GBP/EUR is up around 0.5% and remain buoyant, albeit within a relatively tight range. The EUR/USD has regained around 1.5-cents, after trading below parity last Thursday, and now trades at a 1-week high.

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