GBP Falls, EUR Faces Political Risks, and USD Gains on Hawkish Fed.

• GBP Weakness: The British Pound fell due to rising bond yields and global equity market declines, with inflation fears dominating investor sentiment.
• Global Influence: With no significant domestic data, GBP’s movement is primarily influenced by international markets, weakening against the Euro and Dollar but potentially gaining against the AUD, NZD, and Scandinavian currencies.
• Euro-Zone Political Uncertainty: The Euro faces economic doubts and political uncertainties ahead of French and UK elections, with potential market impacts from election outcomes and fiscal policies.
• USD Strength: The US Dollar strengthened on Wednesday despite limited data releases, supported by the Federal Reserve’s hawkish stance on interest rates and reduced rate cut bets.
• Upcoming Data Impact: Future movements in GBP and USD will hinge on the upcoming release of finalised Q1 GDP data for both the UK and the US, and US durable goods orders, which could influence market volatility.

GBP: British Pound Tumbles Amid Rising Bond Yields and Equity Market Slump

The British Pound (GBP) faced a significant drop as surging bond yields and declining global equity markets stirred inflation fears among investors. With little domestic data or developments, the Pound’s movements are currently dictated by international investor sentiment and global financial market trends. Typically, falling equity markets weaken the Pound against the Euro and, more sharply, against the Dollar. However, the GBP can gain ground against other currencies like the Australian and New Zealand Dollars and Scandinavian currencies in such scenarios.

“Indices fall back as inflation worries return,” notes Chris Beauchamp, Chief Market Analyst at IG. “Higher inflation in Australia hasn’t helped and suggests a potential return of the inflation issues that plagued the past two years, potentially prompting rate hikes from central banks again.” The Pound to Euro exchange rate fell 0.20% on Wednesday, holding at 1.1812 on Thursday. A quiet French election this weekend could push it below 1.18. The Pound to Dollar exchange rate dropped by 0.5% to 1.2616. “GBP plummeted to 1.2616. Downward momentum is picking up, and a break of 1.2600 wouldn’t be surprising. The next level to watch is 1.2550,” says Quek Ser Leang, Markets Strategist at UOB. “The trade-weighted dollar remains an unstoppable juggernaut as Fed officials make aggressive moves, and global conditions continue to favor currency weakness.”

EUR: Euro-Zone Economic Doubts and Political Uncertainty Ahead of Key Elections

The Euro-Zone faces economic uncertainty, overshadowed by political developments as France and the UK prepare for crucial elections. Markets are closely watching the French political scene ahead of this weekend’s first round of parliamentary elections. ING commented, “Markets seem to be reconciling with a potential National Rally victory and parliamentary gridlock, especially after Le Pen’s party tried to ease fiscal concerns.” They added, “Investors are more sensitive to a better-than-expected result from the New Popular Front, which proposed a EUR 25bn spending plan for 2024 and another 150bn by 2027, seen as a greater fiscal threat.”

At the European level, Danske noted reports suggesting Ursula von der Leyen could be nominated for another term as Commission President, with former Portuguese Prime Minister Costa as European Council President and Estonian Prime Minister Kallas as EU Foreign Policy Chief. “If this trio secures the top jobs, it could stabilize the EU politically, especially following the French election. A second term for VDL means continuity in EU politics, while Kallas as high representative signals continued support for Ukraine,” Danske observed.

USD: US Dollar Strengthens Amidst Hawkish Federal Reserve and Limited Data Releases

The US Dollar (USD) climbed against most of its peers on Wednesday, despite a lack of US data releases. The USD gained strength as Federal Reserve interest rate cut bets dwindled. Federal Reserve policymaker Michelle Bowman reinforced the hawkish stance, stating, “Inflation in the US remains elevated, with several upside risks. I am willing to raise the federal-funds rate if inflation progress stalls or reverses. Reducing our policy rate too soon could cause an inflation rebound, necessitating further rate increases to achieve the 2% inflation target over the long run.”

This hawkish tone weakened current interest rate cut bets, boosting USD exchange rates. Looking ahead, the Pound to US Dollar exchange rate will be influenced by the finalised GDP data from both the UK and the US for the first quarter. The US will release its GDP figure on Thursday. Will a confirmation of an underwhelming 1.3% reading undermine the Greenback? Additionally, Thursday’s US durable goods orders, expected to decline, could impact the USD. The UK’s finalised GDP data for Q1 2024, set for release on Friday, could introduce volatility to the GBP if it falls short of expectations.