Top Currency Pairs Tuesday 3rd May 9:00 UTC GBP/USD: 1.25390 (Last Week: 1.27464) EUR/USD: 1.05020 (Last Week: 1.07431) GBP/EUR: 1.19395 (Last Week: 1.18648)
Market Update
Pound Sterling Technical indicators are signaling that the GBP is heavily oversold against the USD, however, with there appearing to be no light at the end of the tunnel for the Ukraine conflict, risk will stay tilted to the downside for the UK economy. GBP weakness could also ensue should the Bank of England (BoE) signal that rate hikes will be paused in response to weaker growth on Thursday. Andrew Bailey said twice in April that the BoE will be walking a tightrope when judging how much further interest rates may need to go to bring down inflation, stating there is a very fine line when tackling inflation to not create a recession. A dovish BoE hike with this global uncertainty won't do the GBP many favors, but it also shouldn't send the Pound much lower than it already is against other G10 currencies. Long-term forecasts will be a more important driver for the markets and could hamper the Pound's rebound. Either way, expect the markets to be extremely volatile this week with the Federal Reserve (Fed) meeting taking place on Wednesday which is expected to see US interest rates aggressively hiked by 50bps.
Euro The Euro fell to a five-year low against the US Dollar last week and gave back its recent gains against the Pound Sterling following a cut in supplies of Russian gas to the bloc. Moreover, the latest inflation data published last Thursday showed inflation in Germany reached 7.4% year on year, which is the fastest increase in more than 40 years. Initial estimates expected a dip from March to 7.2% as a fall in energy prices due to a demand slump from China should have brought down inflation. This only adds pressure on the European Central Bank (ECB) to start raising interest rates and this weighed on the Euro heading into the weekend with continued expectations that the ECB will remain cautious.
U.S. Dollar The Dollar continued to make headway last week as rate expectations and risk sentiment heavily supported the greenback. The war in Ukraine is now into its third month, and combining this with concerns in China with new lockdowns and Covid restrictions, the Dollar is finding some tailwind. The GBP/USD exchange rate slipped into the 1.25 territory for the first time in 21 months. On Wednesday, the Federal Reserve (Fed) will elevate interest rates by 50bps which was all but confirmed by Jerome Powell 2 weeks ago and is already heavily priced into the current market levels. Therefore, the real focus for the markets will be any guidance for the remaining five meetings by the end of 2022.
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