Fed rhetoric will dominate the pound against the euro and the dollar
Business confidence data will shape US debate, Fed rhetoric will dominate Pound and Euro moves
The main feature of the start of this week was optimism that the US Federal Reserve will be able to take a less aggressive stance on interest rates amid weaker growth and easing inflationary pressures.
The latest comments from Fed speakers on Tuesday were generally hawkish and challenged that optimism with a strong rally in US yields.
Risk appetite was weaker, with tensions over Taiwan also a key factor in undermining sentiment.
Trading volumes will remain low for seasonal reasons in the short term, which will keep the threat of high volatility across all asset classes.
US return and risk trends are expected to dominate in the near term.
British Pound and US Dollar Exchange Rate Outlook
The exchange rate between the pound and the dollar (GBP/USD) did not improve on Tuesday and ultimately recorded significant losses.
Global developments were the main influence, with risk conditions less confident amid concerns over the situation in Taiwan.
Rising US yields were also key during the day and GBP/USD fell to lows below 1.2150 before settling around 1.2165 early in Europe on Wednesday.
Risk conditions will remain significant in the near term and caution will be in order ahead of Thursday’s Bank of England (BoE) policy decision.
Overall, GBP/USD will struggle to regain ground in the near term, especially with reduced opportunity for short cover ahead of the BoE decision, with any rebound capped below 1.2250 at this stage.
Euro (EUR) exchange rate today
Eurozone developments were again relatively muted on Tuesday, but there were significant moves in the euro.
The euro to dollar (EUR/USD) exchange rate failed to advance and retreated to lows of 1.0150 before recovering slightly.
There are still very significant reservations about the economic outlook for the Eurozone, especially without significant relief on gas prices.
Overall, EUR/USD will depend on a weaker dollar to regain ground in the near term.
ING noted; “The ECB’s trade-weighted euro measure is at its lowest for the year – which is understandable, given the challenges that high gas prices pose for European industry and consumers for the rest of this year. Any new hawkishness from the Fed could then easily bring the EUR/USD back to parity.
US Dollar (USD) Exchange Rate Outlook
The Dollar initially staged a limited rally from 4-week lows on Tuesday and US buying momentum accelerated after the US open.
The Fed’s latest rhetoric has been more hawkish than expected with San Francisco Chairman Daly, for example, stating that the work on inflation is far from nearly done and that the Fed still has a long way to go. She added that the central bank is looking at incoming data to decide whether the pace of rate hikes can be slowed or maintained at the current pace.
The dollar index rallied strongly, although it faded slightly from the highs.
Reservations about the situation in Taiwan are also likely to limit short-term dollar selling opportunities as choppy trading continues.
Fed discussions are expected to be largely hawkish in the near term, which will support the US Dollar.
There has been renewed volatility in Japanese Yen trading over the past 24 hours as geopolitical concerns clash with sharp moves in US yields.
The exchange rate between the pound and the yen (GBP/JPY) fell sharply to hit a 2-month low just below 159.50 before a strong recovery to near 162.00 on Wednesday.
New Zealand’s unemployment rate rose to 3.3% for the second quarter, from 3.2% and above expectations of 3.1%, while there was no increase in employment compared to expectations of a 0.4% increase.
The New Zealand dollar lost ground, particularly on fears that Taiwan tensions could potentially hurt exports to China
The exchange rate between the British pound and the New Zealand dollar (GBP/NZD) posted a 4-week high around 1.9540 before falling to 1.9425.
The Australian dollar was also hurt by reservations about Chinese developments and the exchange rate between the pound sterling and the Australian dollar (GBP/AUD) reached three-week highs at 1.7650 before falling to 1.7540. .
The day to come
The latest US ISM data for the services sector will be released on Wednesday and will be important for underlying confidence in the US economy. All components will be material, with a focus on inflation data.
Markets will also be watching comments from Fed officials closely as there will be a significant impact on yields and the dollar.
Geopolitical concerns will continue to be closely watched with particular emphasis on Taiwan. There will be further ramifications of House Speaker Pelosi’s visit to Taiwan, particularly with China engaged in a military exercise starting Aug. 4.