The GBPEUR exchange rate has hit a new 2023 high of 1.17 on Friday afternoon- Sterling has technically been strong over the last month or so with back-to-back gains against the Euro and Dollar. The reason for the strength has now been due to interest rate hike bets- with the BoE having to continue down the path of higher rates due to high inflation, traders are betting on a stronger Sterling. Germany and the Eurozone are also now technically in a recession which has also contributed to Euro weakness over the last week, especially with the UK narrowly escaping a recession (For now).
A few Central Banks have had surprise rate hikes recently, including both Canada and Australia- showing that though traders have been betting on this current tightening cycle to end, it clearly isn’t enough and demand hasn’t slowed enough globally- this week we have 2 central bank decisions with two very different situations.
The first is the Fed on Wednesday- currently no hike is expected, however, this will be data-driven, mainly by inflation data that comes out for the U,S on Tuesday, The expectation is 5.3%, which would be a lower reading on Core and 4.1% on normal CPI- this should be enough to not warrant any further hikes for now, but as we have seen with other Central Banks, nothing is guaranteed- so I would advise being nimble on this release. If we do see a surprise hike then I expect to see the Dollar to gain a lot of strength very quickly- but if we do not get a hike as expected, then we will wait to hear what is said in the press conference following the rate decision to give us an idea of forward guidance through and after the Summer.
On Thursday the ECB have their rate decision- and on this one we are expecting a hike of at least 25bps- again, the main news will be what happens at the press conference, as the Eurozone is already in a recession, it will be interesting to see how many more hikes are required by the ECB, demand has clearly slowed and now they need to find the fine balance to a soft landing to ensure their economy doesn’t get worse.
Prior to these releases, we do have some UK-focused data that will determine if this current GBP strength continues or halts for now- this will be Tuesday morning’s UK employment change data and unemployment rate- which is expected slightly higher showing the UK jobs market has begun to slow down a little. The enxt day we have UK GDP, balance of trade, Industrial production and Manufacturing production- all of which are expected to come in mixed- so if we see positive results, then Sterling can go higher, anything negative will halt the current rally.