Currencies Direct – Currency outlook

Euro rocked by dovish ECB signals, US dollar slumps on June rate cut bets

Euro

EUR/GBP: Unchanged at £0.85

EUR/USD: Up from $1.08 to $1.09

Trade in the euro has been mixed in recent weeks. While the single currency was supported by its negative correlation with the US dollar, a dovish shift from the European Central Bank (ECB) has acted as a key headwind.

While ECB President Christine Lagarde appeared to downplay expectations for an April interest rate cut in the wake of the bank’s March policy meeting, subsequent comments from ECB policymakers have repeatedly referenced a potential spring rate cut.

Elsewhere, some uneven Eurozone data also contributed to the volatility in the euro so far in March.

Going into April EUR investors will be highly sensitive to any signs the ECB might be encouraged to cut interest rates. Of particular focus will be March’s consumer price index. Another cooling of inflation could bolster rate cut bets and weigh heavily on the euro.

Pound

GBP/EUR: Unchanged at €1.16

GBP/USD: Up from $1.26 to $1.27

The pound traded in a wide range over the past month, amid uncertainty of when the Bank of England (BoE) will start cutting interest rates.

This was driven in large part by some mixed UK data releases, as well as the latest forecasts from the Office for Budget Responsibility (OBR) in which it predicted domestic inflation would return to 2% in the second quarter of 2024.

Sterling then faced notable selling pressure in the second half of March in the wake of the BoE’s latest policy meeting, in which no policymakers voted for an interest rate hike for the first time since 2021.

GBP investors will be keeping a close eye on UK data over the coming month as they seek to determine, whether the BoE may cut rates before the summer.

US Dollar

USD/GBP: Down from $0.79 to $0.78

USD/EUR: Down from €0.92 to €0.91

The US dollar faced some notable selling pressure over the past four weeks, with USD exchange rates striking multi-month lows in the first half of March.

Driving this pullback in USD were expectations the Fed is getting closer to cutting interest rates.

The US dollar’s worst levels came in the wake of the latest US payroll figures. A surprise rise in unemployment coupled with January’s figures being revised sharply lower stoked bets for a June rate cut.

Stronger-than-expected US inflation figures briefly revived USD demand as it trimmed Fed rate cut bets, before some dovish comments from Fed Chair Jerome Powell in the wake of the US central bank’s latest policy meeting applied fresh pressure to the ‘Greenback’.

Looking ahead, the USD selling bias may remain in place so long as US data reinforces bets for a June rate cut from the Fed.

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