GBP surges and the rally may not be done yet...

Credit Suisse backing GBP to push on

The Pound has now risen by 3.0% against the Euro in 2023, taking the exchange rate to its highest level since December, and further gains can be expected according to one particular investment bank.

Credit Suisse was one of the only major banks to maintain a bullish stance on Pound Sterling heading into 2023, a stubborn stance that has proven fruitful in recent weeks.

In a new briefing to clients, Shahab Jalinoos, head of FX research at Credit Suisse in Zurich, says his original target against the Euro of 1.15 has been comfortably breached and the pair can continue to move higher as Sterling strengthens further.

"One of our core views throughout 2023 has been that UK rates pricing has been far too benign given the very obvious price and wage pressures in the UK economy. Ultimately the BoE is an inflation-targeting central bank and for now, that target is still 2%, even as the UK has the biggest inflation problem in the G10," says Jalinoos.

The Pound has risen against the Euro over recent days to its highest level since December 2022 at 1.1650, held aloft by rising UK yields and a relative underperformance by yields in the Eurozone following softer-than-expected Eurozone inflation releases this week.

A quiet end to this week and a relatively quiet week lies ahead for the Pound from a data perspective.

Euro outlook versus the US Dollar brightens after ECB inflation win

The Euro to Dollar exchange rate climbed back toward 1.07 and ultimately breached this level after Eurostat figures suggested continental inflation fell further than was expected in a May outcome that could mean the single currency has scope for a rebound toward 1.11 and its earlier highs in the weeks ahead.

Europe's single currency climbed after Eurostat said inflation likely fell to 6.1% in May, from 7% previously, following a broad moderation that left the annual pace of price growth running below the 6.3% economist consensus.

Meanwhile, the more important core inflation rate fell from 5.6% to 5.3% when the average of economists' forecasts was that it would fall only as far as 5.5%.

"Regarding the negative surprise in core inflation, the German cheap transport ticket probably played a role which implies that the negative surprise was partly temporary," says Tuuli Koivu, an economist at Nordea Markets.

"Indeed, according to the preliminary data, price pressures in many German service sectors continued to be robust and the small decline in Italy’s annual service price inflation (from 4.8% to 4.6%) was due to a base effect," Koivu says following a review of the data.

Attentions are now focused on Tuesdays Eurozone Retail Sales figures for April as well as Thursdays GDP figures for Q1 of 2023.

US Dollar limps to one week lows

The U.S. dollar fell to a near one-week low versus major peers as trading opened this morning, on course for its worst week since mid-January, amid strengthening views that the Federal Reserve will forgo an interest rate hike this month.

The US Senate's passage of a bill to suspend the debt ceiling and avert a disastrous default also removed a pillar of support for the Dollar, which had paradoxically been a key beneficiary because of its safe haven status.

The US Dollar index, which measures the Greenback against a basket of six rivals, weakened 0.06% to 103.48 in Asian trading, extending a 0.62% slide from Thursday, its worst day in almost a month.

For the week, the index is on course to lose 0.73%.

Philadelphia Fed President Patrick Harker said on Thursday that "it's time to at least hit the stop button for one meeting and see how it goes," referring to the June 13th/14th meeting.

Some softness in US manufacturing data overnight supported the case for a pause, although jobs figures continue to print hot, putting even more focus than usual on the monthly non-farm payrolls report later in the day.

"The key is non-farm payrolls today, which could determine if there's going to be a hike in coming months, whether that's in June or July," said Shinichiro Kadota, senior currency strategist at Barclay in Tokyo.