British Pound reaches highest level since 2022
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Daily Currency Update
The Euro weakened on Friday against both the Pound and the US Dollar following a decline in the Eurozone Harmonised Index of Consumer Prices (HICP), as anticipated. Headline inflation decreased from 2.6% to 2.2%, which heightened market expectations for a rate cut by the European Central Bank (ECB) in September—a move that now seems almost inevitable. As a consequence, the Euro dropped by over 1% in response to the inflation figures.In the UK, mortgage approvals reached their highest level since 2022, according to British lenders. Although house prices saw a slight decrease, they remain 2.4% higher than the previous year. While the Pound experienced a modest decline on Friday, futures markets suggest that the ECB and the Federal Reserve are likely to cut rates more swiftly than the Bank of England, which is helping to support the Pound.
In the US, the Personal Consumption Expenditure (PCE) Index released on Friday indicated that price pressures increased at a slower pace than expected. Core inflation rose by 2.6% year-on-year, slightly below the forecast of 2.7%. This has dampened expectations for aggressive rate cuts by the Federal Reserve this year. However, markets continue to anticipate a 25 basis point reduction in borrowing costs at the Fed's September meeting.
Key Movers
Price pressures in Germany, the largest economy in Europe, have normalized closer to 2%, boosting market confidence that the European Central Bank (ECB) could reduce borrowing costs during its September meeting. This outlook is further supported by Germany's economic situation, as the country is now in a technical recession after experiencing a 0.1% contraction in the second quarter of this year. Consequently, it is likely that the Euro will remain under pressure throughout the week.The Pound has surged to a 2.5-year high against the US Dollar and is also performing strongly against the Euro. Last week, it reached 1.3200 against the Dollar, surprising markets, especially considering it had fallen to 1.0300 after Liz Truss’s mini-budget in 2022. The rally is largely attributed to expectations that the Bank of England will be slower to cut interest rates. However, this also makes the Pound vulnerable if there are changes in monetary policy forecasts.
The US Dollar gained momentum late last week following inflation data that met expectations, diminishing the likelihood of the Federal Reserve cutting rates by more than 25 basis points at its September meeting. Currently, markets are pricing in 100 basis points of interest rate cuts by the end of the year, although Federal Reserve officials have emphasized that future decisions could be strictly data-dependent.
Expected Ranges
- GBP/USD: 1.3100 - 1.3150 ▼
- GBP/EUR: 1.1860 - 1.1895 ▼
- GBP/AUD: 1.9350 - 1.9410 ▼
- EUR/USD: 1.1035 - 1.1080 ▼