EUR and USD trading at parity

GBP

The pound hit its lowest level against the euro yesterday since 2021 as investors bet the European Central Bank (ECB) will continue to raise interest rates aggressively at its future policy meetings. The ECB will need to continue on its course to try curbing record inflation in the Euro bloc.

The pound slumped to 1.1464 in yesterday trading after the UK GDP data showed that growth slowed more than expected in July. The pound later recovered in the afternoon trading and was up against the US dollar at 1.17.

The UK economy expanded by just 0.2% between June and July which was under market expectations of a 0.4% growth. Sterling continues to suffer from many challenges: recession fears, an hawkish US Federal Reserve that continues to raise its interest rates, and political uncertainty that has weighed on the pound since the beginning of summer. The market continues to price in aggressive interest rates increases from the Bank of England but this has not been enough to support GBP against both the euro and USD.

The extra bank holiday next Monday for the Queen’s funeral has also stoked the prospect of the economy going into recession in the third quarter as the country loses another day of economic activity.

This mornings data for the UK has been a mixed bag with the unemployment rate falling to 3.6% above a forecast of 3.8%, but the claimant count rose to 6.3k against a forecast of -13.2k.

EUR

The euro finds itself in a similar position against the dollar as European countries battle inflation and deal with their own energy crisis due to the conflict in the Ukraine. This has led to the euro trading at parity against USD. However as the ECB raised interest rates last week by 75 basis points, the largest increase in twenty years, the European currency seems to be better supported than the English pound.

ECB sources have indicated that they may need to raise interest rates to 2% by next year. This statement resulted in the market upgrading their expectations for further aggressive monetary policy tightening in the coming months with the possibility of a further 75 basis points interest rates rise next month.

Key announcements

13:30 – USD – CPI m/m – Forecast -0.1%

13:30 – USD – Core CPI m/m – Forecast 0.3%