06/12/2024
Written by: Ian Morley
GBP/EUR
Summary
The British Pound has remained under pressure against the Euro, hitting a one-month low. UK government bond yields spiked following Chancellor Rachel Reeves’s budget announcement, where increased spending measures were perceived as inflationary, prompting markets to scale back expectations for Bank of England (BoE) rate cuts. Despite these expectations, the Pound hasn’t strengthened, with markets concerned about increased UK borrowing.
Meanwhile, Eurozone inflation data surprised on the upside, with the Consumer Price Index (CPI) increasing from 1.7% to 2% year-on-year. This reduced the likelihood of a significant rate cut by the European Central Bank (ECB) in December, helping the Euro gain against the Pound.
Outlook
The British Pound may see further volatility as markets digest the impacts of the UK’s new fiscal policies. With BoE rate cuts now looking less probable, any signs of persistent inflation could help stabilise the Pound. However, the Euro could remain strong if the ECB adopts a cautious stance on rate cuts due to sustained inflationary pressures. Near-term fluctuations will likely depend on inflation and growth data from both the UK and the Eurozone.
GBP/USD
Summary
Sterling dipped to a two-month low against the US Dollar, with broader market sentiment cautious due to the UK budget and looming BoE policy decisions. Despite some anticipation of BoE rate cuts, others expect rates to remain at 5%, as inflation concerns linger in the wake of increased public spending. The Pound has been underperforming, as it struggles against a Dollar bolstered by upcoming US Nonfarm Payrolls (NFP) and manufacturing data.
Outlook
The Pound’s trajectory will be closely tied to BoE decisions and US employment data. If US job and manufacturing numbers show resilience, this could reinforce Dollar strength. BoE’s next meeting could be a turning point; if policymakers hold off on rate cuts, the Pound might find some support. However, if inflation persists or further cuts are anticipated, Sterling could continue to face headwinds.
EUR/USD
Summary
The Euro experienced a slight pullback against the Dollar after an earlier rally, with rising Eurozone inflation reducing expectations for deep ECB rate cuts. The Dollar, meanwhile, remained resilient, buoyed by solid US labour market data and steady wage inflation, as markets look toward the US employment report and other economic indicators.
Outlook
The EUR/USD pairing will likely be influenced by US employment data later today. Strong NFP and manufacturing results could support the Dollar if they point to economic strength, though Dollar gains may be tempered by US election uncertainties. Meanwhile, the ECB’s cautious approach toward rate cuts due to inflation pressures may continue to underpin the Euro, keeping the currency pair in a relatively balanced state in the short term.
Final Summary
The currency market is showing considerable movement, with the Pound under strain from UK fiscal policies and borrowing concerns. The Euro is gaining slightly as higher inflation reduces the likelihood of significant ECB rate cuts, while the Dollar’s stability may depend on today’s US employment figures. Market dynamics will be shaped by upcoming BoE, ECB, and Fed decisions, as well as key economic data releases in the weeks ahead.