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After a strong performance last week, sterling goes into the new week over 0.5% higher against both the dollar and euro in comparison to last Monday. There was a particular focus on the GBP/EUR rate as it hit a 20-month high; the best rate for buying euros since before the pandemic. The new high against the euro came courtesy of a number of factors, which include expectations for higher interest rates at the Bank of England and rising global stock markets. The odds of an interest rate rise taking place in November remain elevated after Governor Andrew Bailey said at the weekend the bank is set to raise interest rates as inflation risks arise. On that note, a key piece of data to keep an eye on this week is Wednesday’s release of inflation data. Normally, stronger-than-expected data would be deemed supportive of the UK currency. However, with ‘stagflation’ being increasingly mentioned across the economy, a softer-than-forecast could prove to be supportive of sterling.
The GBPEUR exchange rate opens the week at yearly highs above the 1.1850 level as traders price in the prospect of a December rate rise from the Bank of England. In Germany, Germany’s Green Party voted to formally join talks to be part of the country’s next coalition government, a swift conclusion to the German leadership vacuum would help the euro currency. Johannes Benigni, chairman of JBC Energy Group, told CNBC that European leaders have created chaos in their transition to cleaner energy. Bengini also said that even if Russia opens up the energy taps into the winter, Europe is still only around 75% of gas stocks. Further economic data saw European and German ZEW economic sentiment coming in lower than forecasts. Germany’s figure was 22.3 compared to expectations of 24 and marked a steep downfall from the 84.4 highs back in May.
The GBP-USD reached its biggest weekly gain since may due to a combination of dollar weakness and increasing expectations that the Bank of England will hike rates this year encouraged the upward movement. The pound will likely be driven by news headlines rather than data early this week, the Rightmove house price index the only UK economic indicator in the calendar for the start of the week. This Wednesday investors will keep a close eye on the market due to inflation figures are due to be released and a lot of economists expect inflation to peak at over 6%.
Any potential USD strength this week is dependent on expectations that the US Federal reserve may begin hiking rates sooner than initially anticipated. The Dollar has rallied since September on expectations the Fed would tighten Monetary policy quicker than first anticipated amid an improving economy and increasing energy prices.