Euro Gains On Hawkish ECB Sentiment

By Simon Eastman

All the major central banks are taking their turn releasing statements regarding their stance on interest rates and inflation, with the Fed pausing interest rate hikes but mentioning only for now and they may start to hike again in the future. Despite the chance of further hikes this year, normally giving the currency a boost, the pause, and the poor jobless claims data from yesterday, has given the pound the boost to rally against the greenback, reaching levels not seen in over a year, back in April 2022.

Yesterday it was the European Central Banks turn to talk rate hikes, adding 25 basis points to the base rate and hinting we could see another 25-basis point hike in July. They have upgraded the inflation forecasts from that released in March, which showed inflation at 2.2 percent in 2025, rather than being at their 2 percent target. Christine Legarde also focussed on wages including union negotiated higher wages being the cause of inflation, hinting many times in her speech that all this meant higher interest rates for longer. She also only committed to talking about another rate hike in July and nothing past this, which leaves the door wide open to further increases going forward. This contrasts with previous meetings where the expectation was diminished, and we saw the euro weaken off the back of it. The result was an immediate half cent dump on GBP/EUR. Fortunately for those with sterling in hand, the uncertainty gave traders the confidence to back sterling again, allowing some of the losses to be gained back.

The Bank of England is thought to be aiming for another possible 5 rate hikes into early 2023, so this more certain outlook has allowed the pound to stay buoyant. We all await next week when we have inflation on Tuesday and then the Bank of England meet on Thursday, where a hike is widely expected but the focus from markets is more surrounding the accompanying statement to try and get some certainty to future hike plans rather than just trader speculation, which has given sterling its recent good run.

The week ends with just a couple of key releases, starting with EU core consumer prices, where the expectation is for no change from the previous month. Any change in this will likely move the euro so we could see some rate movement on GBPEUR as the day opens with the release coming at 10am. Following that, we wait until after lunch for the US Michigan consumer sentiment index, which is key as it gives insight into how consumers are spending and in turn implying a strong labour market, with people in work happy to spend, leading to stronger economic growth. Generally, a reading above 50 shows growth and positivity for the economy and under 50 is more negativity. The expectation is for an improvement from 59.2 up to 60, so slight gains but going in the right direction. For those looking to buy dollars, keep in touch around this time. We have seen some 15-month highs on cable, so it might be worth taking advantage this morning in case the data changes that rally.

As always, the team at A Place in the Sun Currency is here to help guide you through the ever changing currency markets so get in touch today.