Forex: British Pound, Euro Hit 5-Month Low Vs USD
In the forex market, British pound, Euro and Canadian dollar depreciated to 5-month low versus US dollar. The British pound fell below the $1.25 mark, the lowest since November pressured by increased dollar-buying due to geopolitical tensions and expectations that the Fed will maintain rates higher for longer.
Stronger-than-expected US inflation print pushed back expectations of the first Fed interest rate cut to September. Also, in the UK, traders have adjusted their forecasts for interest rate cuts this year.
The Bank Rate is now anticipated to decline to around 4.75% by the end of 2024, down from today’s 5.25%, a shift from the previous expectation of a drop to 4.5% by December. Banks Face Risks over 24hrs FX Positions Sell Down
Making things worse, Policymaker Megan Greene asserted that rate cuts in the UK should still be distant, citing a greater threat of inflation persistence in the UK compared to the US.
The euro weakened to below $1.065 in April, the lowest in five months, pressured by diverging scenarios for the European Central Bank and the Federal Reserve and increased dollar-buying due to geopolitical turmoil.
The ECB left interest rates unchanged in its April meeting and signaled that if underlying inflation continues to slow at the predicted pace, it could be appropriate to reduce levels of monetary tightening in June.
Such a move perfectly contrasts with expectations of the Fed’s path, after evidence that US inflation is sticky at levels above the central bank’s target drove markets to delay bets of the Fed’s first rate cut from June to September.
The disparity between both policy outlooks was magnified by geopolitical concerns due to the increasingly hostile environment between Israel and Iran, escalating worries of warfare and driving emerging markets across the globe to pile into the greenback.
The Canadian dollar weakened past 1.364 per USD in April, marking a five-month low, pressured by the strength of the US dollar amid safe-haven demand following Iran’s intentions of retaliation against Israel.
Domestically, during its April meeting, the BoC maintained its overnight rate target at 5% and reiterated its plan to reduce its balance sheet.
Governor Macklem cautioned against interpreting core inflation declines as conclusive, emphasizing the need for sustained assurance. Additionally, upward revisions in economic growth forecasts to 1.5% from 0.8% supported hawks in the central bank, reducing support for the loonie.
Looking ahead, economists anticipate the first BoC rate cut in June, diverging from the market consensus of the Fed holding rates, as robust US inflation data tempered expectations of Fed rate cuts, further bolstering the greenback.
