CURRENCY OUTLOOK: EURO WEAKENS AS MARKETS REIN IN RATE HIKE EXPECTATIONS, US DOLLAR REBOUNDS ON FRESH FED BETS

Euro

EUR/GBP: Down from £0.88 to £0.87

EUR/USD: Down from $1.10 to $1.07

The euro weakened at the end of April after Eurozone GDP missed forecasts, before the start of May brought more headwinds for the sin- gle currency as markets responded to the European Central Bank’s (ECB) interest rate decision. The ECB slowed its pace of policy tightening and did not commit to further rate hikes, triggering an EUR selloff.

Hawkish comments from ECB offi- cials cushioned the euro’s losses. ECB President Christine Lagarde insisted that ‘we’re not pausing’, while other rate setters advocated more tighten- ing.

However, consistently weak Ger- man data raised fresh concerns about a recession in the Eurozone’s largest economy, keeping pressure on the common currency.

A strengthening US dollar also weighed on the euro due to EUR’s negative correlation with USD, al- though ongoing hawkish ECB rhetoric saved the single currency from steeper losses.

The ECB’s June policy decision is in the spotlight for EUR investors over the coming month. A 25bps hike is expected. But could a dovish outlook see the euro fall further?

Pound
GBP/EUR: Up from €1.13 to €1.14 GBP/USD: Down from $1.24 to $1.23

Sterling found success through late

April and early May, despite a scarci- ty of impactful UK economic data. Market bets on another Bank of Eng- land (BoE) interest rate rise boosted the pound.

An upward revision to the UK’s fi- nal services PMI then lent GBP fur- ther support. Activity in the UK’s vital services sector hit a one-year high in April.

However, the middle of the month brought headwinds. Follow- ing the BoE interest rate decision, the bank’s Governor Andrew Bailey said inflation is set to fall sharply from April, which saw markets pare back expectations for further tightening.

Mixed GDP data then saw Sterling waver. The UK economy expanded by 0.1% in the first quarter of this year, but unexpectedly contracted by 0.3% in March.

The pound still rose against its weaker peers, despite a shock rise in UK unemployment, as concerns about second-round inflation effects kept BoE bets alive and GBP afloat.

The BoE will meet towards the end of June to set interest rates. If persistently high core inflation prompts the bank to raise rates again, Sterling could soar.

US Dollar
USD/GBP: Unchanged at £0.80 USD/EUR: Up from €0.91 to €0.92

A pullback in Federal Reserve rate rise bets put the US dollar on the backfoot through the end of April. Fresh turmoil in the US banking sec- tor saw markets revise their expecta- tions for further policy tightening, while weaker-than-forecast GDP added to the downside.

USD faced further losses through the first week of May. Although the Fed raised rates by 25bps, it signalled a potential pause in its hiking cycle.

A souring market mood helped the safe-haven ‘greenback’ recover as the month went on, despite some disappointing US economic data.

Hawkish comments from Federal Reserve policymakers also helped USD continue to claw back its earlier losses.

Looking forward, the Fed’s rate de- cision in mid-June is the key event. If the bank leaves rates unchanged, USD could slump. Before then, in- vestors will use the latest inflation and jobs data releases to gauge how the Fed might act.

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