GBP Recovery, USD Weakness, and EUR Testing Key Levels.
- GBP Recovery: The British Pound is rebounding, driven by strong UK economic growth, healthy labor markets, and robust retail sales, with expectations it could rise further against the Dollar, Euro, and Swiss Franc.
- BoA’s Pound Forecast: Bank of America predicts GBP could hit 1.35 vs USD and 1.20 vs EUR and CHF by year-end, while it may reach 213.60 vs JPY, its highest since 2008.
- Sterling’s Appeal: The Pound’s relatively high yield attracts traders, especially against lower-yielding currencies like the Euro, Yen, and Swiss Franc, but it’s vulnerable to volatility.
- USD Weakness: The US Dollar has weakened following a 50 basis point Fed rate cut, but analysts caution it could recover if inflation rises or the Federal Reserve signals caution on further cuts.
- EUR/USD Resistance: The Euro is nearing its key resistance level of 1.12, but its movement is largely dependent on US Dollar trends and Federal Reserve policy rather than Eurozone data.
GBP: Strong Growth Fuels Sterling’s Climb
The British Pound has bounced back from early August lows, driven by solid economic growth in the UK and a healthy labor market. Retail sales remain robust, despite the Bank of England’s tight monetary policy aimed at curbing inflation. Inflation, however, came in lower than expected for July. Bank of America Global Research strategists believe the Pound has room to climb further, projecting it could hit 1.35 against the US Dollar and 1.20 against both the Euro and Swiss Franc by the end of the year. They noted, “GBP remains the best performing G10 currency year-to-date,” pointing to the resilience of the UK’s economic outlook despite recent weakness. A notable prediction is the Pound’s potential rise to 213.60 against the Japanese Yen, which would be its highest level since the 2008 financial crisis. Sterling’s relatively high yield makes it attractive to traders, especially against lower-yielding currencies like the Euro, Swiss Franc, and Yen. However, the large speculative positions taken in these trades make the Pound vulnerable to volatility in uncertain times.
USD: Dollar Weakness Persists Amid Fed Rate Cuts
The recent surge of the Euro against the Dollar is largely due to U.S. developments, particularly the Federal Reserve’s significant 50 basis point rate cut last week, which spurred Dollar weakness. Although the market is optimistic about further cuts, some analysts believe the Dollar could make a comeback as recent movements stabilize. Kristina Clifton from Commonwealth Bank states that while the USD may fall in a low-volatility environment, any shift in sentiment could lead to recovery. Eyes are on Friday’s core PCE figures, a key inflation gauge, which could challenge the market’s expectations for further rate cuts. Comments from Fed Chair Powell and Vice Chair Williams later this week will be crucial, as any caution regarding the pace of future cuts could trigger a rebalancing of the market.
EUR: 1.12 Resistance in Focus for the Euro
For the Euro, all eyes are on the 1.12 level, where previous rallies faltered in August 2024 and mid-2023. Analysts expect EUR/USD to test this resistance if the Dollar continues to weaken. Kristina Clifton from Commonwealth Bank sees a test of 1.12 as likely, but whether it happens this week is uncertain. While momentum for the Euro remains neutral, Peter Chia from UOB notes that the chances of breaking this year-to-date high have increased. However, the real driver of the Euro’s movements remains the US Dollar and Federal Reserve policy, overshadowing any impact from upcoming Eurozone data like Germany’s IFO survey.