Pound Strengthens Amid Election, Euro and Dollar Volatility.

  • Pound Sterling Holds Strong: The Pound to Euro exchange rate stays above 1.17 and Pound to Dollar rate above 1.27, driven by unexpected UK inflation and General Election announcement.
  • BoE Pre-Election Purdah: The Bank of England’s pre-election purdah reduces the likelihood of a June rate cut, boosting the Pound.
  • Euro’s Bullish Trend: The Euro remains in a short-term uptrend against the Dollar, with technical indicators suggesting further gains, influenced by upcoming German and Eurozone inflation data.
  • US Dollar Weakens: The Dollar slips amid lower market volatility and increased risk appetite, with key economic data ahead that could shape Fed rate cut expectations.
  • Crucial Economic Indicators: Upcoming data releases, including US core PCE inflation, house prices, and consumer confidence, are pivotal for future market movements and rate expectations.

GBP: Pound Maintains Strength Amid Pre-Election Purdah

The Pound to Euro exchange rate remained above 1.17 for the fourth day in a row on Tuesday, while the Pound to Dollar exchange rate held strong above 1.27. The Pound’s rise followed last week’s unexpected UK inflation report and the announcement of a General Election, which has put the Bank of England in a pre-election purdah. This means Bank of England officials will refrain from public comments until after the July vote.

“The Bank of England’s cancellation of public engagements until the July 4 UK general election is positive for the pound, as it reduces the already low risk of a BoE rate cut next month,” said Robert Howard, a Reuters market analyst. Previously, markets saw over a 50% chance of a rate cut in June, which had weighed on the Pound. However, the higher-than-expected inflation report in April lessened these expectations, boosting the Pound. For a rate cut to happen in June, the Bank’s Monetary Policy Committee would typically need to prepare the market through a series of speeches, which won’t occur now. Therefore, the earliest possibility for a cut is in August. This scenario supports the Pound against currencies from central banks expected to cut rates sooner, such as the European Central Bank.

“The BoE may avoid making headlines during the election campaign with an unexpected rate cut two weeks before Britain votes. Any Monetary Policy Committee member considering joining Swati Dhingra and Dave Ramsden in voting for a cut is likely to wait until August 1,” added Howard. “Markets scaled back their rate cut expectations, strengthening the GBP to our three-month target. As the BoE will likely cut after the ECB, we continue to forecast a robust pound,” stated David Alexander Meier, an analyst at Julius Baer. The ECB is expected to cut rates in June, with the Federal Reserve likely to follow in September. “Several ECB policymakers indicated a potential rate cut at next week’s policy meeting, with a possible follow-up reduction in July,” noted Rhys Herbert, an economist at Lloyds Bank.

EUR: Euro-Dollar Outlook Remains Positive Despite Inflation Concerns

The Euro to Dollar exchange rate is expected to maintain its positive trend in the week starting May 24. Despite a minor decline last week—the first in six weeks—against the Dollar, the Euro remains in a bullish setup. A strong rebound from the low 1.08s last Friday suggests further gains ahead. “A solid rebound from the low 1.08 area has led to a bullish reversal on the 6-hour chart, indicating additional EUR gains to the 1.0855/60 zone. Progress above here should allow for further advances to the 1.09 zone, with support at 1.0800/10,” said Shaun Osborne, Chief FX Strategist at Scotiabank.

Key events influencing the Euro include Germany’s inflation figures on Wednesday and the Eurozone’s on Friday. German CPI is expected at 2.8% year-on-year, with the Eurozone’s at 2.5%. Lower-than-expected inflation would support ECB rate cuts, potentially weighing on the Euro, while higher-than-expected inflation would have the opposite effect.

USD: Dollar Slips Amid Lower Volatility and Growing Risk Appetite

On Tuesday, the US Dollar edged lower as short-dated US rates held steady amid reduced cross-market volatility and increased investor risk appetite. This shift is partially due to expectations of a soft US economic landing ahead of the core PCE inflation data release on Friday. The core Personal Consumption Expenditures (PCE) price index for April is expected to show a modest 0.2% month-on-month increase, consistent with earlier CPI and PPI data. This data could reshape expectations for a potential Federal Reserve rate cut in September, currently estimated at a 44% probability. Confirmation of benign inflation could further pressure the dollar.

Today’s economic releases include March house price data and May consumer confidence figures, with the latter being particularly important given its downward trend since January. Concerns are growing about whether spending by the top 20% of income earners can sustain the economy amid challenges faced by the lower 60%. ING has suggested that higher interest rates might eventually curb consumer spending and slow US growth throughout the year. The US Dollar Index (DXY), measuring the currency against a basket of other major currencies, is nearing a crucial support level at 104.40. A drop below this level could prompt investors to reduce their long dollar positions ahead of significant data releases later this week.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.