Testing times ahead with interest rate decisions

By Kian Songra

To round off the back end of last week, the euro rallied against the pound and dollar after an inflation surprise. EU inflation on Friday came out at 2.6% year on year, from 2.4% previously, and exceeded expectations of 2.5%. This caused euro strength and subsequently gained on both the pound and dollar possibly due to the premise of holding off an interest rate cut; however, these gains have now been subdued with the previous highs on the GBP/EUR being re-tested.

The start of June brings with it a heavy week in terms of data. Today the most notable release is the ISM manufacturing PMI, which is released monthly and is a leading indicator gauging business activity in the US manufacturing sector. The consensus is that the release will increase to 49.8 from the previous 49.2. PMI data can signal a shift in the economic cycle and stronger than expected prints typically have a positive impact on the dollar.

Wednesday sees Canada releasing their interest rate decision and monetary policy statement. The consensus is that they will lower the interest rate by 25 basis points to 4.75% from the 5% that has been held since July. With anyone with upcoming Canadian dollar requirements, it could be prudent to discuss our various payment options to mitigate your risk. If the interest rate is lowered, it will likely weaken the Canadian dollar as it detracts foreign capital flowing into the country. US Services PMI is also released, and it is predicted to increase to 50.5 from 49.4. A stronger reading usually helps the dollar gather strength against its rivals.

Thursday is the day that those with sterling in hand to keep an eye on as the European Central Bank (ECB), release their interest rate decision and monetary policy statement. This is in light of its goal of meeting its inflation target, which we have surprisingly seen an increase to 2.6% last Friday. The market consensus is that the ECB could be the first of the three majors to cut the interest rates from the 22 year high of 4.5% to 4.25%. With the cut on the cards, we could see Sterling maintain its current buoyancy, however, this established level of resistance has proven difficult to break, having failed to break through for the last 6 times. Therefore, whilst we are at the peak, it could be worth considering locking in your currency requirements to take advantage of the strength before any potential drop-offs.

The Monetary Policy statement may influence the volatility of the Euro and determine a short term positive or negative trend. Investors will closely analyse any hints about the ECB’s plans regarding future decisions on interest rates and so we could see increased trading volatility. With the potential for the euro to gain strength, it may dampen the current 18-month high trading levels we are witnessing on GBP/EUR.

On Friday the Eurozone GDP figures are set to be released, providing a crucial indicator of the region’s economic health and recovery trajectory. If the figure shows growth from the previous 0.4%, there could be a chance for the euro to peg back gains on the other major currencies. In the United States, a flurry of data is released, including the highly anticipated non-farm payrolls report will be published, offering insights into employment trends and potentially influencing Federal Reserve policy decisions. Additionally, ECB President Christine Lagarde is scheduled to deliver a speech, where her comments could shed light on the European Central Bank’s stance on monetary policy amidst ongoing economic challenges. These events are likely to attract substantial attention from investors and policymakers, given their potential to sway market sentiment and economic forecasts.

With a heavy week ahead in terms of data with possible action on interest rates as well as political uncertainty in the UK it will be prudent to keep in touch with your currency consultant to avoid the risk and create certainty for your upcoming purchases so speak to one of the team today for some friendly guidance.