The Pound Euro (GBP/EUR) exchange rate posted fresh six-month highs at €1.1650 before a marginal correction on Thursday's session on FX markets.
The Pound to Dollar (GBP/USD) exchange rate again found support close to $1.2350 against the dollar on Wednesday and jumped to highs at 1.2450 amid a tentative dollar correction and month-end position adjustment.
GBP/USD was unable to hold the gains and drifted towards 1.2400 on Thursday before settling around $1.2430.
Bank of England Expectations Hold Firm
In comments on Wednesday, Bank of England MPC committee member Mann stated that the UK had a bigger inflation problem than the US and Euro-Zone with businesses looking to increase prices in order to protect and strengthen margins.
ING noted; “True to form, however, Mann warned that UK consumers were using excess pandemic-level savings to fund spending - and that corporates were taking advantage of better pricing power to improve margins.
All major economists expect that the BoE will increase rates at the June policy meeting and a majority expect that rates will be increased to at least 5.00%.
Overall yield expectations have continued to underpin the UK currency in global markets.
HSBC commented; "The UK's April inflation print was a shocker. That calls for action. Given a data-dependent Bank of England, we now expect two more 25bp rate rises (in August and September) on top of the one we already expected in June."
German and Euro-Zone Inflation Declines
The German data recorded a decline in inflation to 6.1% for May from 7.2% previously. The HICP rate also declined to 6.3% from 6.8% previously.
The headline Euro-Zone inflation rate dipped sharply to 6.1% for May from 7.0% and below consensus forecasts of 6.3%.
The core inflation rate also declined to 5.3% from 5.6% and below expectations of 5.5%.
The data maintained expectations that inflation pressures in the Euro area were easing.
ING added; “This leaves the market pricing close to 100bp of tightening this year and has sent EUR/GBP below 0.8600. And sterling now looks like a decent intra-European target currency for the carry trade. Unless eurozone CPI today surprises on the upside to drag eurozone swap rates higher, EUR/GBP looks as though it can drift to the 0.8550 area.”
A Euro to Pound exchange rate of £0.8550 equates to €1.1700 for Pound to Euro exchange rate.
The ECB will still be concerns over the threat of sticky core inflation.
Berenberg commented; “While inflation is definitely moving in the right direction, it is still much higher than would be consistent with the ECB’s inflation target.”
It added; We thus expect the ECB to still go ahead with two more rate hikes by 25 bp each in June and July before staying put.”
Dollar Holds Firm ahead of Data Avalanche
The US data was mixed on Wednesday with another weak regional manufacturing survey, but an increase in job openings which suggested that the labour market is still tight.
Fed Governor Jefferson stated that skipping a rate increase at the June meeting would give the central bank more time to assess the data, although this did not mean that rates have peaked. Philadelphia Fed Harker took a similar view, reiterating that it would be a skip and not a pause.
There was a shift in Fed Funds pricing with expectations of a June hike dipping to near 30% from above 65%, but the most likely outcome is still seen as a hike in July with a 65% chance of a further hike.
The dollar edged lower, although expectations of a July hike still provided net dollar protection.
MUFG commented; “While a June hike can’t be completed ruled out, the Fed appears to have set a high bar and it would likely require a significant upside surprise from Friday’s non-farm payrolls report to prompt the Fed to take more immediate action to further address upside inflation risks.”
According to Credit Suisse, data releases will be important. It added; “the key path to a much stronger USD from here lies in the form of regular US data so robust that these dynamics are showed far into the background, which indeed was the prevalent mood of that mid-Jan to mid-Mar phase.”
The dollar has also been protected by a lack of confidence in the Euro-Zone and Chinese outlooks.
Morgan Stanley is still positive on the Chinese outlook; “Despite the shift in market sentiment due to weaker Chinese growth in the second quarter, we are still upbeat about our view for growth this year.
Global developments will be a crucial element for the near-term Pound to Dollar (GBP/USD) exchange rate performance.
According to Scotiabank; “Weakness through $1.2335 leaves $1.23 exposed and will bolster the potential for Sterling [vs US dollar] to drop back to the $1.21 area.”