Currency Market News April 23rd

US Dollar remains strong

Since our last update at the beginning of April the US Dollar index has gained almost 2% in value taking GBP/USD and EUR/USD to a 5 month low. The move was triggered by a stronger than expected jobs figure in the US followed by a rising inflation reading which led to the US Fed hinting that the first interest rate cut (which at one point was expected in May), could now be delayed until September. In fact just today, one member of the Fed even suggested a rate rise could be back on the table.

As a contrast, the UK appears to still be on track for a rate cut at the Bank of England’s August meeting. Although inflation is still a little higher than anticipated, the CPI figure release last week has not altered the view that the UK economy is heading for a soft landing with 2-3 rate cuts still priced in for 2024.

The pound experienced some modest strength following the March inflation report as it greatly reduced the chance of an early rate cut in June, but with an August cut still priced in, those gains were soon eroded. Taking all this in to account means it looks increasingly likely that the yield gap between the UK and US will widen as we move through 2024. Right now the difference in interest rates is just 25 bps. If we were to see 3 cuts in the UK this year and potentially no cuts in the US, this gap could widen to 100 bps (i.e. UK interest rates down to 4.75% and US staying put at 5.75%) hence the move lower for GBP/USD.

Shifting the focus toward the Eurozone, Christine Lagarde, President of the European Central Bank has been keen to downplay expectations of an interest rate cut within Europe, actually highlighting that the relative strength of the Dollar adds to the inflationary pressures for the Eurozone. It would seem they too are likely to delay the first rate cut from June to July, and if they skip July there is not another opportunity until September, which would leave the BoE to jump first.

The movement between the Euro and pound has been relatively subdued over the last couple of weeks. This latest round of news would suggest the pound now looks more vulnerable as the path to a rate cut is arguably clearer in the UK than Europe. However, the aforementioned strength in the pound following the inflation release shows there are still opportunities for pound sellers should we see further date releases wide of the mark.

With global borrowing costs remaining higher for longer the global economy is likely to remain risk averse, with investors attracted to the safety of the Dollar, a trend which has been exaggerated this month following the escalating tensions between Israel and Iran. News of Ukraine’s continuing struggles against Russia with rumours the Russians are planning a major offensive effort will create further uncertainty within the market place. It’s a reminder that a cautious approach is needed in the coming months.

For help managing our your FX risk and for more information on the impact price movement may have on your business please contact Pathfinder FX today.