GBP the big winner this week as the US suggests leaving rates higher for longer
GBP: Soaring higher against the Euro and USD as markets favour the Bank of England’s policy which has maintained higher interest rates for a while longer than other economies have indicated rate cuts, which generally weakens a currency.
GBP/USD hovering at 2025 highs near 1.2600 and GBP/EUR above 1.2025 - we have seen UK importers taking this opportunity to hedge or partially hedge exposures at these levels as the medium-term risks to GBP remain.
UK inflation data released tomorrow, Wednesday will be closely watched, alongside Friday’s Retails Sales.
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USD: The Greenback found buying interest today, as investors weigh in expectations that the Fed will keep interest rates in the current range of 4.25%-4.50% for a longer period. On Monday, a slew of Fed officials stated that the monetary policy does not need to be adjusted in the current scenario.
The market awaits Wednesday evening’s Fed minutes from the last interest rate decision meeting - all eyes will be on how many members now want to ‘wait’ and see - leaving rates higher for longer and bolstering the USD.
Fed Governor Michelle Bowman said today that she would like to gain “greater confidence” that progress in lowering inflation will “continue” as the Fed considers making further adjustments. Bowman added that a steady interest rate stance also provides the opportunity to review further ‘indicators’ and “get further clarity on the US Administration’s policies.”
Meanwhile, Philadelphia Fed Bank President Patrick Harker said there are reasons to hold the rate policy stead for now, such as resilient economic growth, a balanced labour market, and still-elevated inflationary pressures.
EURO: The below quote refers to the core problem in Germany, but can be extrapolated out across the EU: "Our strong export orientation makes us particularly vulnerable," Nagel said on Monday. He added that the EU economic output in 2027 would be almost 1.5% lower than their prior forecast. Currently, the Bundesbank sees the German economy growing by 0.2% this year and 0.8% in 2026.
Fears of US tariffs on Germany escalated after President Trump announced that he plans to impose tariffs on imported cars starting around April 2. According to the OEC, the German economy exported $24.3 billion worth of cars to the US in 2023.
Meanwhile, firm expectations that the ECB will cut interest rates 3 times more this year have also capped the Euro’s upside. ECB dovish bets are based on growing risks of inflation undershooting the central bank’s target of 2%.
Service and Manufacturing data on Friday will be closely watched.
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AUD: Delivered an expected 0.25% interest rate cut and the AUD lost value accordingly. However, this MIGHT BE THE END of AUD weakness, because in press conference and statement ….
Bullock pushed back against market pricing of RBA rate cuts and suggested there 'may not be quite as much room to go' in further rate reductions compared to its peers.