Sterling Holds Gains Against Dollar Ahead of US Inflation Data, But Dips Against Euro
Impact on GBP: Pound stands firm against majors
Sterling stays firm near the four-month high of $1.2965 against the US Dollar in today's European session. The GBP/USD pair clings to gains while the US Dollar gauges temporary support ahead of US CPI data for February, which will be published at 12:30 GMT.?The US inflation data will significantly influence market speculation for the Federal Reserve’s (Fed) monetary policy outlook. Against the Euro we have seen GBP/EUR drift lower as the single currency has benefitted from a slightly weaker?Dollar in recent weeks.
Traders expect the BoE to hold interest rates at 4.5%, as officials favour a cautious, gradual easing approach. Last week, four policymakers, including Governor Andrew Bailey, supported a slow reduction in monetary policy restrictions due to persistent inflation. However, BoE member Catherine Mann advocates for quicker easing due to volatility from financial markets and cross-border spillovers. This week, investors are focusing on the UK’s January GDP and Industrial and Manufacturing Production data, due Friday. The UK economy is expected to grow by 0.1%, down from 0.4% in December, with factory output likely to decline.
No Major Data
Impact on EUR: Euro still rather expensive
EUR/USD gained support from Ukraine’s 30-day truce with Russia but retreated from $1.0950 to just below $1.0900 as the Dollar rebounded and the EU announced €26bn in retaliatory tariffs on the US. While a small EUR/USD rise may occur if Russia agrees to the truce, the pair faces resistance due to stretched technicals.
EUR/USD remains about 1.5% overvalued, and CFTC data shows neutral positioning with speculative net-shorts at just 1.5% of open interest. With US core CPI potentially curbing dovish Fed sentiment, the EUR/USD swap rate gap may struggle to tighten and could even widen, making EUR/USD more expensive. Additionally, ECB officials may adopt a more dovish tone after the EU’s tariff announcement.
No major data.
Impact on USD: Dollar has room to rebound
Global risk sentiment soured as President Trump announced a 50% tariff on Canadian steel and aluminum, later retracting it after Ontario suspended a 25% surcharge on electricity exports. While markets hoped for relief from tariffs, signs of stock instability suggest Trump isn't scaling back protectionism. US global tariffs on steel and aluminum took effect today without exemptions.
The Dollar ended lower but began to rebound overnight. With US tariffs in place, market expectations are for the Greenback to recover, especially if data doesn't support market pessimism. The current bearish outlook assumes tariffs harm the US economy, but recession calls have often been wrong in the past.
Inflation remains a concern for the Fed, and today’s February CPI report could boost the Dollar if the core CPI increases by 0.3% MoM, as expected. The Dollar is sensitive to hawkish news, so this could lend to support for the Dollar.
On the political front, Ukraine agreed to a 30-day ceasefire, pending Russia's approval. Domestically, the US House passed legislation to avert a government shutdown, but Senate approval still requires moderate Democrats, and markets remain cautious about the shutdown risk.
Data: 12.30: Core CPI m/m expected 0.3% from 0.4%, CPI m/m expected 0.3% from 0.5% & CPI y/y expected 2.9% from 3.0%.
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