Currency Note

Sterling shrugs off ECB-decision dip and grows again

By Alex Bennett June 16th, 2023

The pound strengthened yesterday

A nervy day for sterling saw it lose close to half a cent against the euro soon after midday, before recovering most of the losses by the end of the afternoon.

On the other hand, it was all positive against the US dollar, with a gain of 1% on the day taking GBP/USD to around 3% stronger since the start of June.

So far this morning there has been some upward movement in sterling against both USD and EUR.

The prompt for the drop in value against the euro yesterday was the decision by the European Central Bank (ECB) to raise its headline interest rate by 0.25% to 4%, its highest level since 2001. There is more of that to come, said ECB President Christine Lagarde, with a further rise expected in July at least.

This is compared to the US Federal Reserve (“The Fed”) which kept rates on hold when they met earlier in the week. On the sterling side of the equation, there are strong hopes (for the markets, if not householders) that the Bank of England (BoE) will follow the lead of the ECB next week.

In business news, Foxconn, the company that manufactures around half of Apple’s products, has moved some production from China to the US as part of its “business continuity planning”. Boss of Foxconn Young Liu told the BBC that some overseas clients had pushed to move production out of China.

Next week will be exceptionally busy for data and events in the UK, with an interest rate decision and inflation data, so make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract; call your Business Trader on 020 3918 7255 to get started.

GBP: Mixed day for sterling ends well

A mixed day for sterling yesterday as the markets assessed the relative hawkishness of central bankers and decided that they would get a better return from the euro in the wake of the ECB’s interest rate decision.

However against the US dollar and Japanese yen the picture was very different, with a sharp rise in excess of 1% by the end of the day.

That positivity around sterling has continued this morning.

Next week is another hectic one for data, with inflation on Wednesday ahead of the interest rate decision on Thursday. A Bank of England rise to 4.75% is probably priced into the value of sterling now.

There will also be retail sales and the Gfk Consumer Confidence reading.

GBP/USD past year

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EUR: ECB stays hawkish

The single currency leapt against the dollar and the pound yesterday as soon as the ECB made its interest rate announcement. But while it lost that gain straight away against the pound, it continued to rise against the US dollar, stretching to 1.1% by the end of the day.

This morning we are waiting for the final inflation data reading for the eurozone, as well as wage growth. Will it have fallen from last month’s 5.7%, which was felt by some analysts to be indicative of a growing wage price spiral?

Next week is relatively quiet for eurozone data, but with a mass of UK data it is a week where EUR/GBP could well be volatile.

USD: Dollar suffers from Fed’s dovish turn

The US dollar lost around 1% against its major rivals including the pound and euro yesterday, stretching its losses over the past week and only bettering the Japanese yen.

The greenback has reached mid-June well over 2% down on the euro and sterling compared to the start of the month.

The reason for the dollar’s weakness has been the Fed’s pausing of interest rate increases this week, while the ECB and BoE plough on.

Yesterday’s positive retail sales data (growth of 0.3% when a drop had been predicted), combined with a fall in inflation on Tuesday to just 4% to show that the US is winning the battle against inflation without apparently trashing its economy.

Data tends to slow down in the US in the latter part of the month, and there is little to get excited about next week, even after the markets open on Tuesday after the ‘Juneteenth” public holiday on Monday. However, Fed chair Jerome Powell will be speaking before Congress on Thursday and the market will be looking for more signs on monetary policy.

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