The pound has strengthened further against the euro and has climbed around 1.5% against the dollar due to a combination of the US Federal Reserve’s latest interest rate decision and gas worries in the eurozone.
Yesterday saw the Fed raise interest rates in the US by 75 basis points. While this was largely anticipated and priced in by markets, comments by Fed Chair Jerome Powell in the aftermath were less hawkish than expected, sending the dollar down.
In the eurozone, gas prices rose almost 2% and the euro slumped following news that Russia has followed through on its threats to restrict a key gas pipeline to Germany. The Nord Stream 1 pipeline is now running at less than 20% of its normal capacity resulting in Ukraine accusing Russia of a “gas war”.
Today, the key releases to look out for are inflation figures for Germany – which has been teetering on the brink of recession – and GDP figures and jobs data for the US.
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GBP: Pound up around 1.5% against dollar
The pound has strengthened further against the euro, trading around a two-month high, and has surged against the dollar. Sterling climbed around 1.5% against the greenback over the course of yesterday following the announcement of the Federal Reserve’s latest interest rate decision.
News that Russia has cut gas supplies to Germany and other European countries has sent the euro lower and has boosted the pound. Nonetheless, this squeeze on Europe’s gas supplies will have a knock-on effect on British energy bills which are forecast to hit £3,850 annually.
The pound is also being supported by hawkish bets around the Bank of England’s next interest rate decision. Markets have almost fully priced in a 50 basis point hike in August and expect the rate to be at 2.25% by the end of the year.
GBP/USD chart over past year
EUR: Euro struggling ahead of German inflation
The euro has fallen further against the pound after Russia cut gas supplies to Germany after threatening to do so earlier in the week. Against the dollar, the euro regained substantial strength yesterday.
European gas prices rose almost 2% yesterday after Russia restricted flows through the Nord Stream 1 pipeline to less than 20% of its normal capacity. Russia has justified this cut as maintenance work, however, Ukraine has accused Russia of a “gas war”. Poland has pledged to be fully independent from Russian gas by the end of 2022.
Later today, we will see economic sentiment and consumer confidence for the eurozone, as well as inflation figures for Germany which has been teetering on the brink of recession.
USD: Fed raises interest rates by 75 basis points
The dollar weakened yesterday following the Federal Reserve’s latest interest rate decision which was largely priced in by markets.
Yesterday saw the Fed raise interest rates in the US by 75-basis points, bringing the rate up to 2.25-2.5%, the highest since 2019. Speaking after the decision, Fed Chair Jerome Powell revealed that another “usually large” interest rate hike may be required in September, but a final decision will be determined by the data. These comments were less hawkish than markets were expecting, which weighed slightly on the dollar in the aftermath.
In the data world, durable goods orders for June came in much higher than predicted, rising 1.9%. This is the fourth consecutive monthly increase and indicates that business spending plans remain strong despite rising interest rates and inflation.
Later today, GDP and initial jobless claims figures will be released.