GBP/EUR approaches four-month high as EU backs down on Brexit legal action

The pound accelerated on Tuesday, amidst relief that the EU has paused legal action against the UK, over its violation of the Northern Ireland protocol.

Sterling looks to be consolidating these gains so far this morning, with GBP/EUR buoyed at €1.1753 and GBP/USD flat at $1.3888. GBP/CAD is rangebound at C$1.7471 while GBP/AUD and GBP/NZD drift higher to AU$1.8890 and NZ$1.9980 respectively.

Looking ahead, will some hawkish forward guidance from the Federal Reserve help to propel the US dollar higher this afternoon?
 

What’s been happening?

The pound trended higher during yesterday’s session, as GBP investors welcomed the news that the EU has suspended legal action against the UK regarding the Brexit deal.

This upside in Sterling was reinforced by Confederation of British Industry’s (CBI) latest distributive trade index, which reported that retail sales volumes in the UK were stronger-than-expected this month.

Meanwhile, the US dollar got off to a strong start on Tuesday, with investors favouring the safe-haven currency as a risk-off mood continued to prevail amidst ongoing coronavirus concerns and uncertainty surrounding the recent regulatory crackdown in China.

However the ‘greenback’ was forced to shed the majority of these gains later in the day, after US durable goods orders printed well below expectations in June.

This pullback in the US dollar offered some support to the euro yesterday, thanks to the strong negative correlation in the world’s most traded currency pairing.

The modest uptick in the euro was also supported by the announcement that 70% of adults in the EU have now received at least one jab of a coronavirus vaccine.
 

What’s coming up?

Top of the agenda today will undoubtedly be the Federal Reserve’s latest interest rate decision.

No policy changes are expected from the Fed this month, but USD investors will be keeping a close eye on the bank’s forward guidance after Fed Chair Jerome Powell signalled at the bank’s previous meeting that it would start discussing the tapering of its stimulus programme.

A similarly hawkish tone this month could send the US dollar sharply higher.

In the meantime, the publication of Germany’s latest consumer confidence figures could drag on the euro this morning, after printing below expectations.

Finally, in the continued absence of any notable UK data releases, GBP investors are likely to look to domestic coronavirus development for direction today.