How will the pound react to the latest US, Eurozone and UK Interest Rate decisions?

GBP EUR Exchange Rate: Weekly Review May 21st  

We have a potentially volatile few trading sessions coming up as investors gear themselves for the latest US, Eurozone and UK interest rate decisions. Markets remain slightly nervous over the banking liquidity fears which surfaced some weeks ago, it will be interesting to see the latest take on this and other issues from the central banks.

Our friends at the US Federal Reserve commence proceedings tonight where it is predicted they will be raising interest rates a quarter of a point. Banking stocks continue to suffer as investors remain wary of potential for the recent banking crisis to escalate.

Expectations could see the US dollar rise in value, although the news is arguably already priced in. The ECB are also expected to follow suit with either a quarter point or half point rise, which is partly explaining the continued strength and rise of the single currency against the pound and the US dollar in recent months.

Next Thursday we come back across the Channel and it is the turn of the Bank of England and their latest interest rate decision, expectations are for a hike again. This might see the pound stronger although of course this news is likely to be priced in too.

What investors will be monitoring closely is the potential for further hikes ahead by all three central banks, plus to get a better understanding of their thinking. We might expect volatility across all the majors, as investors shift their positioning to take account of any changes in interest rate forecasts, depending on the commentary by the banks.

Sterling had been stronger toward the start of April but had declined as we ended last month. I wrote recently about how May is historically a poor month for sterling, with an average drop of 2.4%, this trend is likely to be tested in the coming days and week.

We must factor in potential disruption to markets by the Bank Holiday weekends, where London is closed. London accounts for the majority of globally traded FX and this can lead to thinner trading volumes and increased volatility.

Sterling remains fragile in 2023, as investors begins to suspect the Bank of England is nearing the end of its interest rate hike cycle, and concerns remain over the economic outlook, against the wider backdrop of strikes and a cost of living crisis heaping pressure on policy makers.

If you have a currency transaction to undertake, whether buying or selling the pound, and would like more information on what will be driving levels and what we can expect, please contact me directly.

I am Associate Director at one of the UK’s largest FX brokerages, recently named in the top 100 most influential players in the international payments space.

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