Pound Sterling's Strength: On Track for a Third Weekly Rise Against USD and EUR
The British pound is heading for its third consecutive weekly gain against both the US dollar and the euro, reaching over two-year highs this week. Growth and yield differentials have favoured sterling recently, with increased risk appetite further boosting its performance.
The primary bullish factor for GBP this year has been interest rate and yield differentials, as the Bank of England (BoE) has adopted a more cautious stance on cutting interest rates compared to its peers. Market expectations reflect this, with fewer rate cuts anticipated in the coming years. Currently, only 40 basis points of BoE easing are priced in before year-end. However, there is a downside risk to the pound, as the BoE may cut rates at both its November and December meetings, particularly if services inflation decreases.
Growth divergence is also at play, especially in the GBP/EUR pair. Despite some underwhelming PMI survey results in the UK, overall private sector activity has expanded for eleven consecutive months, reflecting a healthier UK economy compared to Europe. Political challenges in Europe further weaken the euro, giving the pound an additional advantage.
For GBP/EUR, holding above the €1.20 level is crucial for establishing a new trading range. The pair has already broken above its 200-month moving average, suggesting it could achieve its strongest Q3 performance since 2014. Similarly, GBP/USD is on course for its best Q3 since 2013, and its fifth-best on record, defying typical seasonal patterns.
Dollar Downtrend Pauses Amid Mixed US Data and Uncertainty
The recent decline in the US dollar has slowed this week, supported by mixed economic data. Revised GDP figures revealed stronger-than-expected economic growth in the second quarter, while durable goods orders remained flat. Additionally, US unemployment claims dropped by 4,000 to 218,000, marking a new 4-month low and highlighting the labor market's resilience. However, earlier data showed a worsening labour market differential, suggesting a higher unemployment rate in the upcoming September jobs report, which could pave the way for another significant Federal Reserve rate cut later this year.
In the short term, monetary policy dynamics continue to influence the currency markets, signalling further potential dollar weakness. A wave of global stimulus measures boosting risk appetite may also weigh on the safe-haven dollar. However, the upcoming US election in November introduces uncertainty into this bearish outlook. A Republican victory, particularly a clean sweep, is seen as the most USD-positive scenario.
Concerns Rise Over Potential Acceleration of ECB Rate Cuts Amid Economic Struggles
Markets are growing increasingly worried that the European Central Bank (ECB) may speed up its rate-cutting efforts, possibly shifting from its usual quarterly pace at the upcoming October meeting due to deteriorating economic conditions. Although Germany's GfK consumer climate indicator showed slight improvement, persistent declines in consumer sentiment and a rise in savings signal continued obstacles to the region’s recovery. The likelihood of a rate cut at the October meeting has risen to over 60%, up from 40% earlier in the week.
