GBP

Sterling has experienced significant fluctuations in recent weeks, mainly due to the Bank of England's decision to keep interest rates steady at 5.25% for the sixth consecutive meeting on May 9th. This decision initially sparked a sharp sell-off, pushing GBP/EUR down to around 1.1605 and GBP/USD to about 1.2450. However, both pairs have since rebounded, with Sterling now trading at 1.17 against the Euro and 1.27 against the Dollar, largely influenced by dovish signals from the ECB and the Fed.

The Pound’s resilience will be tested this week with the release of the UK’s April inflation data, scheduled for Wednesday. The Office for National Statistics (ONS) is expected to report a decrease in the annual headline CPI to 2.1% in April from 3.2% in the previous month. Core CPI, which excludes volatile items like food and energy, is projected to soften to 3.7% from 4.2%.

A drop in inflation could increase expectations for rate cuts by the Bank of England. Investors are speculating that the BoE might start reducing interest rates beginning with the June meeting. This speculation has been reinforced by comments from Deputy Governor Ben Broadbent, who suggested that rate cuts could be likely over the summer, indicating that the current rates may become less restrictive.

Such a scenario could be less favorable for Sterling, as the prospect of the first rate cuts since March 2020 might reduce the currency’s appeal by decreasing liquidity inflows into the UK economy. Ahead of the inflation data release, market participants will be closely watching BoE Governor Andrew Bailey’s comments on the interest rate outlook, scheduled for 5 pm today.

EUR

The Euro remained in a narrow range against most major currencies yesterday due to a lack of significant economic data from the Eurozone to guide its movement. This lack of direction made it difficult for the Euro to gain any clear momentum.

The main event likely to impact the Euro this week is a speech from ECB President Christine Lagarde on Tuesday. If President Lagarde maintains a cautious tone, the Euro could weaken against other currencies.

Markets are already anticipating that the ECB will start cutting interest rates in June. Any mention of this in her speech could exert additional pressure on the Euro.

USD

The Dollar is struggling to achieve a strong recovery as market confidence grows that the Federal Reserve will begin lowering interest rates from the September meeting. This sentiment has been supported by a decline in the United States Consumer Price Index (CPI) and signs of easing labor market conditions, as indicated by recent Employment and Initial Jobless Claims data.

Despite these economic indicators, Fed policymakers are inclined towards maintaining a restrictive interest rate stance. They argue that a single dip in inflation is not sufficient to ensure that price pressures will sustainably return to the 2% target.

Looking ahead, investor focus will be on the Federal Open Market Committee (FOMC) minutes, scheduled for release on Wednesday. These minutes are expected to reveal that policymakers are committed to keeping interest rates higher for a longer period to solidify their efforts in controlling inflation.

If you have an upcoming currency requirement and would like more information on what is affecting the markets in the coming weeks, please contact us at + 44 751 954 0886.