Central bank policy bets boost the euro and dent the US dollar

Central bank dynamics have driven the currency markets over the last fortnight, with the euro rising and the US dollar falling as markets adjust expectations for further interest rate rises.

GBP/EUR fell from almost 1.14 to a three-and-a-half-month low of 1.12, while EUR/GBP traded between 0.88 and just shy of 0.89.

Meanwhile, GBP/USD traded between 1.19 and just below 1.23, settling around 1.22, and EUR/USD touched a low of 1.05 before hitting a nine-month high of 1.08.

What’s been happening?

The pound fluctuated over the past fortnight. Ongoing worries about the UK’s darkening economic outlook pressured the pound, with strike action intensifying across the public sector. However, an upbeat mood in global markets also offered support to the increasingly risk-sensitive currency.

A larger-than-forecast cooldown in Eurozone inflation undermined the single currency through the first week of 2023. The following week, however, European Central Bank (ECB) officials reiterated their commitment to raising interest rates, which sparked strong gains in EUR.

Mixed economic data caused turbulence in the US dollar at the beginning of January, with some sharp spikes and slumps. The ‘greenback’ then headed steadily lower as the month went on. Cooling US inflation dented Federal Reserve rate hike bets, which dragged USD lower.

Latest currency news

Staying on top of the latest currency news can help you time your transfers more effectively, so find out what you should be looking out for over the next couple of weeks

What do you need to look out for?

The UK CPI for December could cause big movement in the pound. Economists expect a modest deceleration, but if inflation cools more than forecast, as it did the previous month, then Sterling could slump.

For the euro, forecast improvements in the Eurozone services and manufacturing PMIs could see EUR post further gains. Sentiment among German investors, businesses and consumers is also expected to improve, which may add to EUR’s upside.

Across the Atlantic, the US fourth-quarter GDP growth rate may prompt movement. Towards the end of the month, the ‘greenback’ could tumble if the latest PCE price index data shows that inflationary pressure continue to ease.

What’s been happening?

The pound was met by heavy selling pressure at the start of August following the Bank of England’s (BoE) latest interest rate decision. While the BoE raised rates by 0.5%, its bleak forecasts and warning that the UK will slip into a recession later this year, weighed heavily on Sterling sentiment.

Meanwhile the US dollar saw some notable volatility as a cooler-than-expected US inflation print prompted USD investors to reprice their Federal Reserve rate hike bets. 

The euro also traded in a wide range over the past couple of weeks, fluctuating in response to European energy concerns and USD price dynamics.

What do you need to look out for?

Looking ahead, the second half of August may see the pound remain on the back foot amid heightened concerns over the UK’s cost of living crisis and the current political vacuum. 

For USD investors the focus will likely be on the Fed’s Jackson Hole Symposium. Any stronger hints regarding the bank’s policy outlook could inspire movement in the US dollar.

Meanwhile, the movement in the euro is likely to remain tied to concerns over European energy security. While the single currency also likely to be pressured if the Eurozone’s latest PMI figures point to another contraction in the bloc’s private sector.

At Currencies Direct we’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers. Since 1996 we’ve helped more than 325,000 customers with their currency transfers, just pop into your local Currencies Direct branch or give us a call to find out more.