Spectrum FX Daily Report

GBP: The British Pound continues to outperform its peers as data released this morning showed that U.K. gross domestic product grew by 0.2% month-on-month in April, as expected, but manufacturing and construction contracted. The GDP data comes a day after the release of UK labour market statistics that revealed a fall in unemployment in April as job growth continued. On the other hand, payroll data revealed inflation-busting wage growth suggesting the labour market remained tight and that more work has to be done in order to get a grip on inflation. Ultimately, Sterling remains supported by yesterday’s strong wage growth, which boosted the likelihood of continued tightening by the Bank of England next week.

EUR: The Euro dipped in early European trade this morning after yesterday’s recovery against the U.S. Dollar from its late May lows. This follows a diverging central bank policy between the Fed and ECB which seems to be keeping the cross in a bullish trajectory. In fact, ECB President Christine Lagarde has already raised interest rates to 3.75% in the long policy-tightening cycle over the past nine months. For now, market participants are anticipating one more interest rate hike by 25-basis points, which will push interest rates to 4%. Ultimately, inflation in Eurozone is more than three times of required inflation and ECB policymakers believe that the current monetary policy is not restrictive enough to threaten the shared continent’s growth. However, economic prospects and data in the Eurozone are telling a different story.

USD: The U.S. Dollar fell sharply yesterday and is struggling to find supporting during the current session after soft U.S. inflation data largely cemented the view that the Federal Reserve will decide to keep interest rates unchanged later in the day when it concludes its two-day policy-setting meeting. The U.S. consumer price index rose just 0.1% last month, a year-on-year increase of 4.0%, the smallest increase since March 2021. With a pause now largely priced in, the uncertainty largely hangs around the language the Fed officials will use to guide future moves, i.e., whether the central bank will want to reinforce the idea that the tightening cycle is not yet done.

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