Pound extends recovery to almost pre-budget levels

The pound rallied on Thursday, underpinned by the Bank of England’s (BoE) bond market intervention earlier in the week.

Sterling is mostly subdued so far this morning, with GBP/EUR flat at €1.1363, while GBP/USD slips to $1.1140. GBP/CAD is rangebound at C$1.5243, while GBP/AUD and GBP/NZD hold steady at AU$1.7164 and NZ$1.9489, respectively.

Coming up, will a spike in German inflation propel the euro sharply higher today?

What’s been happening?

The pound shot higher through yesterday’s trading session, as the currency continued to find support in the wake of the BoE’s intervention into the UK bond market on Wednesday.

Limiting Sterling’s gains however were a series of interviews by Prime Minister Liz Truss, in which she made it clear she is sticking by her fiscal policy plans, despite the adverse reaction by markets.

The euro also firmed on Thursday. The single currency being underpinned by the publication of a hotter-than-expected German consumer price index.

At the same time, we saw the US dollar supported by a cautious market mood yesterday, which caused skittish investors to favour the safe-haven currency.

However, the upside in USD exchange rates was capped somewhat by the release of the latest US GDP figures as they confirmed the US slipped into a technical recession in the first half of 2022.

What’s coming up?

In the spotlight today will be the latest CPI reading for the Eurozone as a whole.

If the Eurozone inflation figures print at hot as yesterday’s German release, we could see the euro strengthen this morning on the expectation it will place more pressure on the European Central Bank (ECB) to maintain or even accelerate its current pace of monetary tightening.

USD investors will be focused on the Federal Reserve’s preferred indicator for inflation, the core PCE price index. A stronger-than-expected print in August could bolster Fed rate hike bets and propel the US dollar higher.

Meanwhile the pound may continue to strengthen today. Data released earlier this morning saw UK GDP revised up from -0.1% to 0.2% in the second quarter, easing fears the UK is already in a recession.