The pound strengthened on Monday as GBP investors welcomed the UK government’s U-turn on high-income tax cuts.
Meanwhile, the pound is trading in a narrow range so far this morning, with GBP/EUR stable at €1.1958 and GBP/USD flat at $1.3503. GBP/CAD is subdued at C$1.7003, while GBP/AUD and GBP/NZD hold steady at AU$1.8868 and NZ$2.0192, respectively.
In the spotlight today will be the Federal Reserve’s latest interest rate decision. Will some hawkish forward guidance propel the US dollar higher?
The US dollar remained well supported yesterday as another slump in equity markets spooked investors and bolstered demand for the safe-haven currency.
What’s been happening?
This came ahead of the Federal Reserve’s latest monetary policy meeting, with investors growing concerned the Fed’s move toward tightening its monetary policy could impact the recovery in global growth.
As a result of the negative correlation between the pairing, the US dollar’s strength continued to supress demand for the euro yesterday, leaving EUR exchange rates to weaken in spite of Germany’s IFO business climate index printing above expectations in January.
The pound, meanwhile, fluctuated on Tuesday in response to the latest UK political headlines.
This initially saw Sterling retreat following reports of a birthday party held for Boris Johnson during the 2020 lockdown, before bouncing back as it was suggested the Sue Gray inquiry into the ongoing ‘partygate’ scandal might be delayed, potentially offering the PM a temporary reprieve.
Centre stage today will undoubtedly be the Fed’s first interest rate decision of 2022.
What’s coming up?
The Fed is widely expected to leave interest rates on hold this month, leaving the focus to primarily be on the US central bank’s outlook for the rest of the year.
USD investors are increasingly betting the Fed will pursue up to four interest rate hikes this year, and should the bank’s forward guidance appear to support this the US dollar could soar.
In the meantime, the focus for GBP investors is likely to remain on UK politics. Contrary to reports yesterday, the Sue Gray report into alleged lockdown breaches at Downing Street is expected to be published later today. Expect the pound to fall if the report is seen as putting more pressure on Boris Johnson to resign.
In the absence of any notable Eurozone data releases, the euro may be primarily influenced by Italian politics today, with the single currency potentially dipping amidst worries the country could be headed towards a snap election if PM Mario Draghi takes the role of president.
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