Weekly currency forecast: Pound to slump if UK inflation falls near BoE target

Currencies Direct May 20th 2024 - 2 minute read

The US dollar suffered heavy losses last week as cooling US inflation boosted bets on multiple Federal Reserve interest rate cuts this year.

Looking ahead, the UK’s April inflation rate – due out on Wednesday – is forecast to cool sharply to 2.1%. If so, the pound could plummet.

Pound

The increasingly risk-sensitive pound rose against its safer rivals last week thanks to an improving market mood. However, a rise in UK unemployment and some dovish comments from Bank of England (BoE) policymakers limited GBP’s gains elsewhere.

This week, the UK’s latest consumer price index is in the spotlight. If inflation cools as sharply as expected, bets on a June interest rate cut from the BoE could weigh heavily on the pound.

Euro

The euro was mixed last week, rising against some peers but losing ground elsewhere. While positive Eurozone data and a weaker US dollar supported EUR, growing certainty that the European Central Bank (ECB) will cut interest rates in June undermined the single currency.

Looking ahead, more upbeat Eurozone data could support the euro later this week. The bloc’s latest PMI surveys are expected to show that private sector activity continued to recover this month, hitting a one-year high.

US dollar

The US dollar plunged last week as a decline in US inflation was seen as boosting bets on multiple rate cuts from the Federal Reserve this year. A risk-on mood also dampened the safe-haven currency’s appeal.

The minutes from the Fed’s policy decision earlier this month are due out on Wednesday. If there are signs policymakers are optimistic that US inflation is returning to target, increased rate cut bets could see the ‘greenback’ face further losses.

Australian dollar

A bullish market mood supported the risk-sensitive Australian dollar last week, although the ‘Aussie’ was stifled by a larger-than-expected rise in Australian unemployment.

AUD exchange rates could fall this week, if the Reserve Bank of Australia’s (RBA) latest meeting minutes strike a dovish chord.

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