Pound weakens as markets wait for key central bank meetings
Sterling closed yesterday’s session softer across the board as markets eye the eagerly anticipated Bank of England and European Central Bank interest rate decisions. Last night, the Federal Reserve in the US announced they would raise interest rates by 25-basis points to 4.75%. The announcement was followed by a statement by the Fed chair Jerome Powell who suggested their current rate hike cycle was coming to an end. The Fed believe the deflation process has begun and are likely to only raise rates once more during this current cycle.
The dollar sank against all its major counterparts following the announcement. Cable (GBPUSD) breached 1.24 momentarily before retreating ahead of the BoE later today. USDEUR is at its lowest since April last year which means EURUSD is testing the 1.10 handle.
The euro also enjoyed a positive day against the pound with GBPEUR dropping to a two-week low. Now could present a window of opportunity for euro sellers as the pairing is trading within range of the four-month high. Euro sellers will be hopping for a bullish ECB announcement that would provide further headwinds for the currency. Markets are expecting a 50-basis point hike, however, there is an outside chance we could see 75-basis points.
Eurozone GDP and PMI services & manufacturing data were stronger than expected at the least reading. This gives the ECB ammunition to be aggressive with their next rate-hike without the fear that the economy is cooling down. They will also be buoyed by the latest IMF figures which predict that Germany will no longer face a recession while the French and Italian economies will grow.
Unfortunately, the same cannot be said for the UK. The IMF downgraded the forecast for the UK which means it is the only major economy predicted to face recession in 2023. This significantly weakens the position of the pound against its major counterparts.
Andrew Bailey and the other members of the BoE are expected to announce a 50-basis point hike to bring interest rates up to 4%. Usually this would lend support to the value of the pound however, any negative rhetoric regarding the UK’s economic outlook would do the opposite. As with the US, the pound could soften if there is a suggestion that the current rate hike cycle is coming to an end.
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