CURRENCY OUTLOOK: POUND ROCKED BY FLUCTUATING BOE RATE BETS, US DOLLAR STRIKES MULTI-MONTH LOWS

Unsurprisingly, the ECB’s next interest rate decision will be the primary focus for EUR investors over the next month. While a 25bps hike is widely expected, the euro could face some headwinds if the ECB appears more cautious regarding the potential for further increases.

Pound

GBP/EUR: Down from €1.16 to €1.15

GBP/USD: Up from $1.27 to $1.28

Trade in the pound was highly erratic over the past month, amid speculation regarding future Bank of England (BoE) interest rate hikes.

At the end of June, Sterling was still being pressured by fears the BoE may tighten the UK into a recession to bring inflation under control.

However, these fears began to fade as we entered July, with GBP exchange rates being buoyed by speculation the BoE may deliver another 50bps rate hike in August. Expectations for which were compounded by a record increase in UK wage growth. Sterling subsequently plummeted as we entered the second half of the month. The publication of weakerthan-expected UK inflation figures triggered a correction in the pound as GBP investors repriced their bets for the BoE’s next rate decision.

Looking ahead, it looks unlikely the pound will be able to retest its recent highs in the near future. In addition to the BoE likely delivering a more modest 25bps rate hike next month, the bank may hail June’s CPI figures as a ‘turning point’ in its fight

against inflation.

US Dollar

USD/GBP: Down from $0.78 to $0.77

USD/EUR: Down from €0.91 to €0.89

The US dollar was supported in late June by some hawkish comments from Federal Reserve Chair Jerome Powell. In which he hinted the bank could deliver another couple of rate hikes by the end of 2023.

However, these Fed rate hike bets were quickly dampened by the publi- cation of weaker-than-expected US payroll figures.

The US dollar then plummeted to a 15-month low against both the euro and the pound in the middle of July. The plunge came as US inflation cooled at a faster-than-expected pace and further undermined Fed rate hike bets.

The ‘greenback’ subsequently rebounded as we entered the second half of the month as demand for the safe-haven currency was strengthened by risk-off flows.

The Fed will deliver its latest interest rate decision in the last week of July. Another 25bps rate hike if expected, but if the Fed signals its hiking cycle has run its course the US dollar is likely to tumble.

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