Euro buoyed by ECB rate hike expectations

Philip McHugh May 27th 2022 - 2 minute read

The euro firmed on Thursday, supported by European Central Bank (ECB) interest rate hike bets.

Meanwhile, the pound is mostly trading in a narrow range this morning, with GBP/EUR flat at €1.1749 and GBP/USD stable at $1.2624. GBP/CAD is muted at C$1.6101, while GBP/AUD and GBP/NZD retreat to AU$1.7702 and NZ$1.9397, respectively.

Looking ahead, will a dip in the US PCE price index undermine the US dollar today?

What’s been happening?

The euro strengthened yesterday, with the single currency being underpinned by growing expectations that the European Central Bank will raise interest rates multiple times in the coming months.

Capping these gains however were ongoing concerns over the war in Ukraine and the continued drag on the Eurozone economy.

The pound, meanwhile, initially trended higher yesterday, with optimism ahead of the unveiling of Chancellor Rishi Sunak’s new cost of living support package, helping to buoy GBP exchange rates.

Despite Sunak’s £15bn fiscal package appearing to exceed expectations, Sterling was quick to shed these gains in the latter half of the European session.

At the same time, the US dollar was muted on Thursday in the wake of the latest US GDP release as the second estimate for the first quarter saw US growth revised down from -1.3% to -1.5%. 

What’s coming up?

In the spotlight today will be the latest US PCE price index. As the Fed’s preferred indicator for inflation an expected dip in the core PCE price index in April could dent the US dollar this afternoon as it likely weakens the case for the Fed to consider a 75bps rate hike in the coming months.

Also potentially weighing on the US dollar will be the publication of the accompanying US personal spending figures. Will a drop in spending increase US growth concerns?

For EUR investors the focus will be on a speech by ECB policymaker Philip Lane. If Lane echoes the hawkish tone struck by several of his colleagues in recent weeks, then the euro might strengthen.

In the absence of any notable UK data releases, GBP investors will have more time to digest Sunak’s fiscal support package. Could a more positive outlook for the UK economy in light of the new measures help to buoy the pound?

Written by
Philip McHugh

Select a topic: