Pound Rallies on BoE Rate Hike Speculation, Euro Slumps on Dovish ECB Expectations

The Pound enjoyed strong support this week, with the currency being underpinned by expectations the Bank of England (BoE) could start raising interest rates sooner than previously expected. 

At the same time, the Euro fell back this week as the European Central Bank’s (ECB) dovish bias became an liability for the single currency. 

Pound Underpinned by BoE Rate Hike Bets 

GBP/EUR – Up one cent on the week’s opening levels 

GBP/USD – Up one cent on the week’s opening levels 

The Pound trended broadly higher this week, initially firming on the back of some hawkish comments from a BoE policymaker, which triggered speculation the bank could hike interest rates by the end of 2021.  

Reinforcing the uptrend in Sterling were some positive UK data releases, revealing another fall in domestic unemployment last month as well as a rebound in GDP in August.  

The publication of the UK’s consumer price index looks to be a key focus for GBP investors next week as another strong inflation reading could reaffirm expectations of an early rate hike from the BoE. 

Euro Undermined by Dovish ECB Comments 

EUR/GBP – Down one pence on the week’s opening levels 

EUR/USD – Up on cent on the week’s opening levels 

The Euro softened again this week, as the divergence in monetary policy between the ECB and its peers looks to grow ever wider as its policymakers reiterated their reluctance to start tightening its monetary policy.  

Adding to the pressure on the single currency was also the publication of Germany’s latest ZEW survey, after reporting economic sentiment in the Eurozone’s largest economy tumbled to a new post-pandemic low this month. 

Acting as the main catalyst of movement in the Euro next week will likely be the Eurozone’s latest PMI releases, with the single currency potentially facing additional headwinds if economic activity in the bloc continued to slow in October. 

US Dollar Side-lined by Optimistic Trade 

USD/GBP – Down one pence on the week’s opening levels  

USD/EUR – Unchanged on the week’s opening levels  

The US Dollar faltered this week, as a prevailing risk-on mood limited demand for the safe-haven currency, in spite of a surprise acceleration of US inflation and hawkish FOMC minutes.  

The US Dollar then remained on the back foot through the latter half of the week as slump in US Treasury yields, offset some stronger-than-expected US retail sales figures. 

Turning to next week’s session, the US Dollar may continue to be driven primarily by market risk appetite, although the latest US Markit PMI releases may also influence USD dynamics. 

Australian Dollar Bolstered by NSW Reopening   

AUD/GBP – Unchanged on the week’s opening levels 

AUD/USD – Up one cent on the week’s opening levels 

The Australian Dollar got off to a strong start this week, as the lifting of lockdown measures in New South Wales on Monday, was welcomed by AUD investors.  

While the ‘Aussie’ was able to broadly maintain its momentum through the latter half of the week, its gains were tempered somewhat by a mixed jobs report. 

Looking ahead, the release of Australia’s latest PMI figures will be closely watched by AUD investors next week, as they look to see whether the easing of regional lockdown measures could have led to a rebound in private sector activity. 

Key Data  

Oct 18 USD Industrial Production (Sep)  

Oct 19 AUD RBA Minutes 

Oct 20 GBP Inflation Rate (Sep)  

Oct 21 USD Initial Jobless Claims (16/Oct)  

Oct 21 EUR Consumer Confidence (Oct)  

Oct 21 AUD Manufacturing PMI (Oct) 

Oct 21 AUD Services PMI (Oct) 

Oct 22 EUR Manufacturing PMI (Oct) 

Oct 22 EUR Services PMI (Oct) 

Oct 22 GBP Manufacturing PMI (Oct) 

Oct 22 GBP Services PMI (Oct) 

Oct 22 USD Services PMI (Oct)