Europe likely to raise rates this week as markets crave clarity over ceasefire announcements
Is a cease-fire in place? Is it holding across the region? This awaits to be seen, and until markets are sure, currency markets will trade with a mixture of caution and instant reactivity to USA-led headlines and announcements. trump says “a deal could be reached in 2 or 3 days” - we have seen this countless times before and with each repetition the words lack impact.
USD:
Any USD losses are likely to remain limited as the market expects gradual rises in US interest rates (which is supportive of the USD). The main theme in USD movement has been choppy trading due to the effects of war, the flip-flopping of headlines regarding a cease-fire and the global effects of higher oil prices
The USD has strengthened recently - after solid employment data on Friday and safe-haven buying due to headlines from Iran.
GBP/USD trading lower at 1.3350 (1.3475 last week) and EUR/USD at 1.1550 (1.1600 in May).
GBP:
The UK currency has held up better than the EUR during the past week, sustaining GBP/EUR above 1.1550. GBP/USD remains weak around 1.3350, pressured by UK political turmoil and a stronger USD.
The Bank of England is expected to increase rates which should strengthen GBP, but political uncertainty and deteriorating economic indicators will cap medium-term strength. The bank has a tough job when looking at interest rates - GBP data released this Friday is likely to show a slowdown in economic activity. Against a backdrop of stubbornly high inflation driven by external forces, it may seem inappropriate to raise rates.
Economists at Societe Generale suggest that any near-term political noise surrounding Manchester Mayor Andy Burnham's bid for the Labour leadership will likely yield limited radical change. On the monetary front, they acknowledge that while hawkish voices within the BoE’s Monetary Policy Committee are pushing hard for an immediate rate increase, the broader consensus will likely favour a more conservative wait-and-see strategy.
We expect these members [those opting for a rate hike] to remain in the minority and for the BoE to keep rates on hold in June.
EURO:
The EURO is drawing support from a generalised view that the ECB will tighten its monetary policy at Thursday’s meeting. The Central Bank is widely expected to hike its deposit rate by 25 basis points to 2.25% amid high inflation and hint at a pause in the medium-term outlook, as sluggish Euro growth will deter the bank from adopting an aggressive monetary policy.
EUR/USD extends gains beyond 1.1550 after bouncing from 1.1500 lows on Monday. ECB tightening hopes and a fragile optimism about a lasting peace in the Middle East are both supportive of a higher EUR/USD rate. Higher German Production data also supported the EURO.
Ahead this week:
Tuesday: ECB President Lagarde speech
Wednesday: China Inflation / US consumer prices / Canadian Rate decision
Thursday: ECB Interest rate decision and press conf. / US Producer Prices
Friday: German inflation / UK GDP, manufacturing and services data / US consumer confidence