Pound, Euro, and Dollar Dynamics: What’s Next for Major Currencies?.

GBP: A recent analysis from UniCredit Bank reveals that the UK’s strict fiscal rules may soon dampen the Pound’s current strength. The report indicates that the Bank of England (BoE) is expected to slash interest rates more significantly than the market anticipates in the upcoming months due to a weakening economy, leading to a notable decline in the Pound’s value. UniCredit suggests that the BoE will delay its first rate cut to September instead of August 1. However, the timing is less critical than the extent of the cuts. They forecast a “huge” rate-cutting cycle that could push Pound Sterling back to crisis-era levels against the Euro and Dollar. This prediction contrasts sharply with other investment banks’ forecasts, which are considerably more optimistic. “We now expect the MPC to start cutting rates in September, but we continue to expect a total of 75bp of cuts this year, and a huge 175bp of cuts next year. This is a faster and deeper rate cutting cycle than financial markets expect,” says Daniel Vernazza, Chief International Economist at UniCredit. Despite being 2024’s top-performing major currency, the Pound’s outperformance is at risk if UK interest rates begin to fall. “Markets are already pricing in a BoE rate cut in September, which we also now expect. We therefore doubt that the GBP will benefit much if the BoE holds steady on Thursday. If the central bank kicks off the heavy easing cycle we still expect over the coming months and in 2025, this will likely weigh on sterling against both the US dollar and the euro,” notes Roberto Mialich, FX Strategist at UniCredit.

EUR: On Tuesday, investors will focus on a series of euro area economic data for July and the second quarter, including preliminary readings for German and Spanish consumer prices. A significant decline in these readings could facilitate further rate cuts by the European Central Bank. Additionally, initial reports on German and euro area GDP for the second quarter are due at 1000 BST and 1100 BST, respectively. The European Commission will also release its euro area economic sentiment index for July, which follows other surveys suggesting renewed growth weakness. Despite the struggling Pound, the Euro (EUR) failed to gain ground on Monday due to a lack of significant Eurozone economic data. EUR investors were cautious, avoiding aggressive bets ahead of high-impact data later in the week. The Euro also faced pressure from its strong negative correlation with the rising US Dollar (USD), which limited its gains against the Pound.

USD: At the time of writing, GBP/USD was trading around $1.2826, down approximately 0.3% from Monday’s opening rate. The Pound (GBP) was under pressure against most of its peers on Monday due to concerns over a £20bn ‘black hole’ in the UK’s public finances. UK Chancellor Rachel Reeves is expected to address this issue in the House of Commons, potentially outlining public spending cuts that could weaken GBP exchange rates. Paul Johnson, Director of the Institute for Fiscal Studies, highlighted that the £20bn gap matches the scale of national insurance cuts implemented by Jeremy Hunt before the election, questioning the policy’s prudence. Continued BoE interest rate cut bets further undermined Sterling on Monday. JPMorgan’s Allan Monks predicted a “quarter percentage point” rate cut this week in a close 5-4 vote, despite unclear justifications based on recent data. The US Dollar (USD) traded mostly flat against its peers on Monday due to limited US economic data, leaving the ‘Greenback’ without clear direction. USD exchange rates were also subdued as investors awaited the Federal Reserve’s upcoming interest rate decision on Wednesday. Although no policy changes are expected, the Fed’s forward guidance will be closely monitored for indications of future actions, potentially introducing significant volatility to USD exchange rates if investors perceive a dovish consensus.