The EUR rebounded, recovering half of its losses from January and reaching a 7-week peak around $1.0950, following the analysis of the recent European Central Bank (ECB) monetary policy decision. As anticipated, the central bank opted to maintain its existing rates and emphasized that borrowing costs would stay elevated for an extended period. In the subsequent press conference, President Lagarde clarified that discussions about rate cuts did not take place during this meeting, citing the need for additional evidence that inflation is progressing toward the 2% target.
GBP is poised to record its most successful week of the year against the USD, surging by more than 1% and reclaiming a position above the $1.28 threshold for the first time in 10 weeks. The upcoming target is the 200-week moving average, currently set at $1.2852, a level the GBP/USD pair has been beneath since July 2023. Despite this positive momentum, attention is now focused on the US jobs report for the day, with GBP/USD experiencing a 1% decline in response to the previous two releases.
GBP has recently distanced itself from key indicators such as yield differentials and equities, although it maintains a notable negative correlation with bond volatility. Notably, when the MOVE index, reflecting expected volatility in the US bond market, decreases, GBP/USD tends to rise. Market volatility, in general, has been subdued across various financial sectors due to expectations of central banks initiating policy easing later this year. However, a surge in cross-asset volatility, particularly in bonds driven by macroeconomic data supporting the idea of sustained higher interest rates, could potentially limit the pound's short-term upswing.
Nevertheless, considering the Bank of England's anticipated moderation in interest rate cuts compared to major counterparts in the coming years and the improvement in UK economic activity, the prevailing outlook suggests a higher trajectory for GBP/USD throughout 2024. This assumption holds true, barring any significant geopolitical disruptions. The next significant domestic assessment for GBP is the UK jobs report next week, with a particular focus on developments in wage growth.
