The Pound Sterling surged on Monday, achieving its best exchange rates for Euro buyers in 34 months. This upward momentum began late on Friday due to a strong U.S. job report that reduced the likelihood of U.S. interest rate cuts. This development also lessened the chances of UK rate cuts, as markets speculated that the Bank of England would follow the Fed in postponing the start of a rate-cutting cycle, boosting UK bond yields and the Pound.
The GBP/EUR price action indicates that the rally is driven by external factors. Performance data shows that the Pound has significantly benefited from the reassessment of U.S. interest rate expectations, appreciating against all G10 currencies except the Dollar. Meanwhile, the Euro has steadily weakened following the European Central Bank's decision to cut interest rates last week.
If regular wages exceed the expected 6.1%, the Pound could rally further, suggesting that the Bank of England's Monetary Policy Committee (MPC) might be cautious about raising interest rates in August to avoid reigniting domestic inflation. Additionally, the UK GDP report due on Thursday is crucial, with markets expecting a 0.1% month-on-month rise for April and a 0.7% year-on-year increase. Any deviation from these expectations could lead to the Pound giving up some of its recent gains.
The GBP/USD exchange rate has been more subdued due to strong U.S. jobs data. The Pound dropped half a percent against the Dollar after U.S. non-farm payrolls rose to 272k in May from 170k in April, surpassing the expected 180k. Average hourly earnings increased to 4.1% year-on-year in May, up from 3.9% in April, exceeding the anticipated 3.9%.
It's a quiet week in the Eurozone, with no major events on the calendar outside of the snap election called by President Macron in France. In the UK, the headline data release is the GDP report on Wednesday, with expectations of a flat result for April. However, the most critical events will be the Fed interest rate decision and the FOMC statement on Wednesday afternoon. Additionally, the US CPI is due on Wednesday, which could introduce some volatility mid-week.
