Pound to Dollar: GBP Trades Near Five-Month Low

Pound Sterling dumped on Middle East tensions

The Pound Sterling (GBP) accelerated its south run against the US Dollar (USD), knocking the GBP/USD pair to levels unseen since late November 2023.

Mounting fears over a fully blown-out war in the Middle East combined with a hawkish shift in the US Federal Reserve (Fed) interest-rate outlook doubled up the demand for the US Dollar at the expense of the Pound Sterling. The underlying cautious environment throughout the week weighed on the risk currencies such as the British Pound. Also, following the UK inflation data release, money markets now fully price in the first Bank of England (BoE) rate cut in November, compared with September previously expected, per Reuters. Meanwhile, Tuesday’s UK employment data had a limited impact on the currency pair. Further, the UK Retail Sales stagnated in March, the Office for National Statistics reported on Friday.

It’s about the US economic data releases in the week ahead, as the UK calendar remains devoid of any significant event, leaving GBPUSD at the mercy of the US Dollar dynamics and the sentiment around the Fed. Apart from the data releases, speeches from BoE policymakers, as well as, the Middle East geopolitical developments will be closely watched by market participants.

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EUR/USD gains ground above $1.0650 ahead of Eurozone PMI data

EUR/USD managed to counter a poor start to the week and reverse course despite the European currency slipping back to the $1.0600 key support against the US Dollar (USD), or five-month lows. However, the pair’s upside might be limited due to the commentary from Federal Reserve (Fed) officials suggesting a shift to an increasingly hawkish stance.

The European Central Bank (ECB) is expected to hold rates steady in its June meeting. The ECB delivered a firm message that markets should expect an interest rate cut soon if we do not have a major shock in development. ECB Governing Council member Madis Muller said that the central bank must not rush into further interest rate cuts after a likely first step in June. Additionally, ECB policymaker Robert Holzmann, one of the most hawkish members, flagged geopolitical tensions as the biggest threat to interest rate cuts this year. The lower bets on rate cut expectations provide some support to the Euro.

On the other hand, the hawkish remarks from the Federal Reserve (Fed) officials and the ongoing geopolitical tensions in the Middle East could lift the Greenback against its rivals.

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16.30: ECB's President Lagarde Speech

US Dollar looking likely to remain strong over the next 3-6 months

The mighty US dollar flexed some muscle last week in a positive sign for Americans purchasing power. The US dollar index, which measures the currency’s strength against six of its peers, closed Tuesday at 106.26, its highest level since early November. The US economy’s remarkable strength is a big reason behind the Dollar’s rally over the past week.

The latest data on retail spending released Tuesday showed that Americans continue to open up their wallets, and other figures released earlier this month show the US job market remains solid and the country’s manufacturing sector is expanding. Federal Reserve officials have said that the economy’s resilience means they can hold rates steady at a 23-year high as they wait for more evidence that inflation is headed toward their 2% target.

On the geopolitical side, there is this flight to quality components, which helps the Dollar. And if you keep having incidents in the Middle East, those shocks will cause a spike in energy prices and those shocks have a proportionally bigger effect on Europe and Japan, but not as much on the US, which is more energy independent.

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