GBP

The UK’s Office for National Statistics reported on Tuesday that the ILO Unemployment Rate edged higher to 3.8% in three months to April from 3.7% previously. This print came in weaker than the market expectation of 3.6%. The weaker data followed the pound entering into bearish conditions against the euro, dropping below 1.17.

Sterling also came under pressure from a stronger dollar after surging US inflation fuelled expectations of more aggressive monetary policy tightening by the Federal Reserve.

Thursday sees the Bank of England’s interest rate decision. Governor Andrew Bailey has indicated a 25 basis points hike, increasing rates to 1.25% with ambition to tackle the rising inflation. However, with the rate hiking amplifying the concerns of a recession, the BoE are likely to hold interest rates at 1.25% which could potentially have a negative impact on the pound.

Yesterday saw GBP/USD rate fall below 1.20 for the first time since 2020 as US yields print fresh year highs.

Collectively the current market conditions suggest that the pound will remain under pressure due to the UK economic slowdown and political uncertainty. Even after an interest rate hike, the pound will still continue to trade in volatile territory.

USD

As US inflation now peaks at 8.6%, the highest inflation rate in forty years has paved the way for the Fed to introduce new monetary policies. Fed officials are looking hawkish in terms of rate hikes with 50 basis points on the table. Strategists at Goldman Sachs have forecasted the Fed could raise interest rates by 75 bps at today’s meeting. According to the CME Group Fed Watch Tool, there is now an 84% probability of the Fed hiking its policy rate by a total of 150 bps at the next two meetings.

If we see a rate increase exceeding market expectations, the dollar could gain further strength in the market. However an expected rate hike could indicate a less ambitious Fed and create volatility in the short term for USD. The growing probabilities of the Fed to continue to hike interest rates has strengthened the dollar position in previous trading sessions.

Key announcements

13:30 – USD – Export Price Index (MoM) (May)
13:30 – USD – Export Price Index (YoY) (May)
13:30 – USD – Import Price Index (MoM) (May)
13:30 – USD – Import Price Index (YoY) (May)
17:20 – EUR – ECB’s President Lagarde Speech
19:00 – USD – Fed Interest Rate Decision
19:00 – USD – FOMC Economic Projections
19:30 – USD – Fed’s Monetary Policy Statement