The European Central Bank to decide on interest rates hike

GBP

The pound climbed to its highest level against the euro last week but remained under pressure against the US dollar.

Sterling benefitted from stronger than expected GDP data which came in above expectations for the month of May. The pound could rally further against the euro and regain its losses against the dollar with a flurry of economic data set to be released this week.

So far the Bank of England has stated the current climate does not warrant for faster tightening of monetary policy. This week’s release of labour market data, inflation and PMI will give more clues as to whether the BoE will deliver a 25 or 50 basis points increase. The main data release which could influence the bank’s decision will be inflation which is set to be published on Wednesday.

Sterling could face further volatility against the euro later during the week when the European Central Bank decides on whether to increase interest rates. A rate hike from the ECB will cause the euro to strengthen thus causing Sterling to fall.

USD

The dollar finished last week on multi-year highs against major currencies, and particularly on a twenty-year high against the euro. The greenback has soared this year thanks to a combination of rising US interest rates and wobbling economies in Europe and China. It pushed above parity on the euro for the first time in almost twenty years before easing back.

However, the dollar could see a pullback against the euro ahead of Thursday’s ECB’s policy rate decision where policymakers are likely to increase interest rates by 25 basis points. Such a hike could strengthen the euro and aid its recovery against the dollar. This would be the first time in over a decade the ECB will be looking to increase interest rates. The Federal Reserve meets later this month and is expected to lift the benchmark for US interest rates by 75 basis points.

Key announcements

10:00 – GBP – MPC member Saunders speaks