Currency outlook: Hawkish Fed turbocharges USD, delay rocks GBP

Currency outlook: Hawkish Fed turbocharges the US dollar, Reopening delay rocks the pound

Euro

EUR/GBP: Down from £0.86 to £0.85

EUR/USD: Down from $1.22 to $1.19

The euro spent the first half of June trading in a narrow range, as optimism over the reopening of more parts of the Eurozone offset some dovish forward guidance from the European Central Bank (ECB).

However the euro then suffered a dramatic drop off in mid-June, as the strong negative correlation in the EUR/USD pairing saw the single currency suffer following a surge in the US dollar.

EUR exchange rates have then remained largely subdued through the latter half of the month, only finding some modest support on the back of some upbeat Eurozone PMI figures.

Looking ahead, with the ECB expected to maintain its dovish bias for some time, and indications that the Delta variant of the coronavirus is starting to spread through Europe, any upside in the euro over the next month may prove limited.

Pound

GBP/EUR: Up from €1.15 to €1.16

GBP/USD: Down from $1.41 to $1.39

The pound has traded in a wide range over the past four weeks, amidst a mix of coronavirus and Brexit uncertainty.

In regards to coronavirus concerns, the rapid spread of the Delta variant throughout the UK, and the government’s subsequent delaying of its reopening date dealt a major blow to Sterling.

Renewed Brexit tensions between the UK and EU over the Northern Ireland protocol has also driven volatility in GBP exchange rates.

Sterling’s attempts to rally towards the end of June were then scuppered by the Bank of England (BoE) as it struck a disappointing dovish tone following its latest policy meeting.

Turning to next month, the direction of GBP exchange rates will largely depend on whether lifting of the remainder coronavirus restrictions goes ahead on 19 July as planned, with any further delay likely to place considerable pressure on the pound.

US Dollar

USD/GBP: Up from £0.70 to £0.71

USD/EUR: Up from €0.81 to €0.83

The US dollar rallied sharply over the past month, with USD exchange rates striking a two month high, following a surprisingly hawkish shift by the Federal Reserve.

The Fed’s more hawkish forward guidance came amidst a sharp upturn in US inflationary pressure in May, as the country’s latest consumer price index printed at a dizzying 5%.

However it wasn’t all plain sailing for the ‘greenback’ with some underwhelming US data, mostly notably May’s non-farm payrolls, which printed well below expectations for the second consecutive month.

Going forward, whether or not the US dollar is able to maintain its positive trajectory will likely depend quite a bit on June’s payroll figures as another disappointing reading could raise some concerns over an unbalance economic recovery.

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