By Grace Smyth
GBP-EUR
Yesterday’s big economic data release came in the form of the European Central Bank’s interest rate decision. It announced that it lowered its rate by 25 basis points as expected. However, the immediate reaction on the markets was not as expected. When a central bank makes an interest rate cut, you would typically expect the strength of respective currency to fall. So in this case the expectation was that Euro would take a hit and give way for Sterling and Dollar to make some gains. This however was not the case. Instead exchange rates sank by 30 pips pretty rapidly before reverting back to its position pre data release. One explanation could be that the markets had pre-priced in the results a little too much – very much a sell the speculation, buy the fact type scenario.
Later in during a speech, ECB president Christine Lagarde noted that they are confident in reaching the inflation target for 2025, stagnation during Q4 was just that, and overall a fairly positive tone.
GBP-USD
Against the Dollar, rates have been equally turbulent. With President Trump retuning to the oval office for a second term, talks of tariffs, taxes and immigration could bring disruption in time but for now the Dollar wins as being the safe haven. Earlier in the week the US central bank held interest rates at 4.5% and commented that they are not in a rush to cut rates again until inflation and jobs data made it appropriate.
Yesterday afternoon US posted some decent jobs data with jobless claims improving from 223k down to 207k and adding another positive outcome for the Dollar.
Today’s data focuses on the US again who post Core Personal Consumption Expenditures – this measures the change of price in goods and services purchased by consumers and is the main tool the Federal Reserve uses to gauge inflation. An increase by 0.1% is expected month on month and would be seen a positive for the Dollar.
Next up on the interest rate policy road trip is the UK who are due to announce their decision on Thursday. Markets are anticipating a rate cut from 4.75% to 4.5%. Certainly, one to watch as a rate cut here could cause the pound to retreat and diminish the gains its made more recently.
Reflecting back on the month, it’s safe to say sterling has faced a pretty turbulent start to 2025. The UK economy seems to have stalled and as a result the Pound’s strength is vulnerable.
This month alone has seen the Pound move in 3 cent range against both the Euro and Dollar. Providing relief to those looking to buy Sterling but not so much for those looking to sell.
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