ExchangeRates.org.uk - Pound Sterling (GBP) got off to a poor start on exchange rate markets this week as Monday brought another rise in UK bond yields.Yields on the 30-year gilt had climbed to 5.472% at the start of Monday’s trading session, striking their highest levels since 1998.
While a sense of calm appeared to fall over the UK and wider global bond market on Friday, it appears that investors are jittery again ahead of key inflation releases later this week.
GBP investors fear the sharp rise in UK borrowing costs will force Chancellor Rachel Reeves to raise taxes and reduce public spending to stay within the government’s own fiscal rules, and this will in turn dampen the UK’s economic prospects.
The question now turns to when these tax hikes and spending cuts will be announced.
Will the Chancellor be able to hold off until her Spring Budget?
Or will she be forced to make an emergency intervention?
Euro (EUR) Exchange Rates Pressured by USD Demand
While the Euro (EUR) was able to strengthen against the Pound on Monday, the single currency struggled to replicate this success elsewhere.
This was primarily driven by the Euro’s strong negative correlation with the US Dollar (USD) as the latter extended its recent bullish run.
USD demand was underpinned at the start of the week by weakening Federal Reserve interest rate expectations, with markets no longer confident that the US central bank will deliver another cut this year.
Looking ahead, the main catalyst of movement for the Pound Euro exchange rate over the next few days is likely to be the UK’s latest consumer price index.
Economists forecast inflation will tick higher again in December, which may weaken bets for another Bank of England (BoE) interest rate cut in the coming months.
However, this may actually weaken the Pound as it could compound the recent rise in UK bond yields.
In the meantime, EUR investors may look to a speech by European Central Bank (ECB) policymaker Philip Lane for fresh impetus on Tuesday.
A dovish outlook may stoke bets for another rate cut this month and drag on the Euro.
This content was originally published on ExchangeRates.org.uk
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