Pound climbs above $1.2600 following Lagarde's comments

GBP/USD rallies to one-year highs.

The Pound has reached year-to-date highs just over $1.2600 against the US Dollar after hawkish comments from the President of the European Central Bank (ECB) Christine Lagarde yesterday. After an initially bearish reaction to the ECB policy announcement the Euro – and Pound Sterling – recovered versus the US Dollar after Lagarde underscored the inflationary headwinds in the euro area during her press conference and the ECB's determination not stop tightening monetary policy to fend off future price rises. Today's Nonfarm Payrolls (NFP) jobs report, could further inject volatility into GBP/USD if it misses expectations (bearish for USD, bullish for the Pound) or comes out substantially higher (bullish for USD, bearish for GBP/USD).

Euro drops after ECB hike.

The ECB has raised interest rates again to maintain its battle against inflation but eased the pace of increase. The main policy rate was hiked by 0.25 percentage points to 3.25% by the euro area central bank's governing council, making borrowing more expensive. It followed a similar increase from the US Federal Reserve on Wednesday night despite the well-documented banking industry crisis, which is linked to rising interest rates, in the world's largest economy. Central banks have been raising interest rates in an effort to bring down inflation which has soared following the invasion of Ukraine and the supply chain difficulties associated with COVID-19 lockdowns. Inflation stood at 7% in the 20 countries using the euro, more than triple the ECB's 2% target rate of inflation. Thursday's rate rise was less than previous increases and represents a slowing in the central bank's programme of hikes. Higher interest rates have lead to higher profits for lenders but have also put pressure on banks as some government bonds - money lent by investors to a state - lose value. Following the ECB event, the Euro lost ground against the US dollar, with EUR/USD dropping below $1.1000. The pair then rebounded but finished far from the key $1.1100 area.

Dollar in decline as interest rates hit 16-year high.

The Dollar fell against most major currencies yesterday after the U.S. Federal Reserve opened the door to a pause in its aggressive tightening cycle, though markets were buffeted by risk aversion amid a rout in regional U.S. bank shares. The U.S. central bank has raised interest rates to the highest level in 16 years in an effort to stabilise prices. The Fed has indicated that Wednesday's rise may be its last, at least for now. The Fed on Wednesday raised its benchmark overnight interest rate by a quarter of a percentage point, its 10th hike in 14 months. In doing so dropped from its policy statement language that it “anticipates” further rate increases would be needed. That sent the Dollar broadly lower and Treasury yields sliding following the decision, with traders taking the comments as a signal for a peak in U.S. rates had been reached and moved to price in rate cuts later this year.