USD eases back ahead of the weekendGBP/USD and EUR/USD still set for 2nd consecutive weekly lossBut GBP/EUR holding steadyU.S. debt ceiling resolution keeps investor sentiment optimisticGBP in focus next week with inflation release
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The British Pound held ground above 1.15 against the Euro and recouped losses against the Dollar as investors squared positions ahead of the weekend amidst a brightening global investor sentiment.
The Greenback looks set to record a second successive weekly advance against the two European currencies consistent with its broad-based outperformance.
"It's reversal Friday where the trades that worked for most of the week find themselves under pressure as market participants take profit and reduce risk into the weekend," says W. Brad Bechtel, Global Head of FX at Jefferies LLC.
Improved sentiment helped European currencies higher as regional stock markets were sitting on handsome weekly gains while equities in the U.S. prodded higher levels following growing signs U.S. leaders were on course to reach a new fiscal settlement.
"The U.S. dollar's surge to two-month highs was cooled as cautious optimism over a deal to raise America’s borrowing cap underpinned risk sentiment. The dollar, on track for a second straight weekly rise, hovered near three- and seven-week peaks versus the UK pound and euro, respectively, and remained within arm’s reach of six-month highs against the yen," says Joe Manimbo, Senior Currency Analyst at Western Union.
Above: GBP/EUR (top) and GBP/USD at one-hour intervals showing this past week's price action.
Kevin McCarthy, the Republican House Speaker, said a bill to raise the US debt ceiling could be put to a vote as early as next week, offering hope that the White House and Congress will strike a deal to avert default ahead of the June 1 deadline.
May is nevertheless proving to be a month of Dollar outperformance, with investors recalibrating expectations regarding the number of rate hikes due out of the Federal Reserve.
Resilient data of recent days have seen bets firm for another hike in June, prompting investors to buy Dollars.
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"The greenback has enjoyed a burst of strength over recent weeks as signs of a resilient U.S. economy dovetailed with hawkish remarks from Federal Reserve officials," says Manimbo.
The Dollar's rebound has exacted a greater toll on the Euro than the Pound, ensuring the cross Pound to Euro exchange rate (GBPEUR) has remained supported above 1.15.
The Pound to Dollar exchange rate (GBPUSD) has fallen a per cent in May to 1.2432 while the Euro to Dollar exchange rate (EURUSD) has 2.0% to 1.0794 at the time of writing.
The remainder of the month could rest with how much further the Dollar can rally: an extension of the rally would pressure GBP/USD but recent dynamics suggest this could keep GBP/EUR supported.
Dollar setbacks could meanwhile see EUR/USD outstrip gains in GBP/USD, potentially pressuring GBP/EUR back below 1.15.
"I expect the dollar to weaken again, for the optimism surrounding the U.S. debt deal has not filtered through the more risk-sensitive foreign currencies yet. If you look at the rallying global equity markets, investors are evidently very optimistic about the US debt ceiling negotiations and not too worried about the slowdown in China," says Fawad Razaqzada, an analyst at City Index.
The coming week will however see the British Pound trade on more idiosyncratic drivers as PMI figures for May are due (Tuesday) as is the all-important CPI inflation release (Thursday).
Headline CPI inflation is expected to fall to 8.3% year-on-year from 10.1% in April. The Pound could rally if inflation comes in above, or in line, with expectation as this would shore up bets for a further 25 basis point rate hike at the Bank of England on June 22.
But an undershoot would likely see these expectations retreat, thereby potentially weighing on Sterling exchange rates more broadly, ushering in another consecutive weekly loss against the Dollar.
"We see the pound being well-supported by overall better data and political tensions being priced out. Thus, we think any unexpected pullbacks below 1.23 could be used to build up GBPUSD long positions," says Thomas Flury, Strategist, at UBS.
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