EUR (1.088) ▲

▪ Despite the Fed's hint of a possible pause in its May meeting, the EUR weakened over the course of the last two weeks due to the unstable global risk environment caused by recessionary fears and the ongoing impasse over the US debt ceiling. The EUR was also pressured by the European Central Bank's (ECB) less hawkish than expected 25 basis points (bps) rate hike. However, ECB President Lagarde's hawkish statement has helped the EUR limit its losses.

▪ The bloc's currency may continue to be heavily influenced by the USD's trajectory, which will likely be determined by the outcome of US debt ceiling negotiations. If there is no encouraging progress, the USD index (DXY) could rise to above the 103.0 level due to an increase in safe-haven flows, weakening the EUR. However, any hawkish guidance by the ECB, coupled with dovish signals by the Fed on June 15, may help to support the EUR to recover above the 1.10 level.

GBP (1.251) ▬

▪ The UK's higher-than-expected inflation reading and strong wage growth have led to an aggressive repricing of Bank of England (BoE) rate hike expectations, benefiting the pound. However, the ongoing risk-off sentiment, coupled with a 0.3% MoM contraction in the UK’s March GDP (consensus: 0.0%), has hampered the pound's upward momentum.

▪ The focus now will be on the UK's inflation and wage growth data. If the readings come in hotter-than-expected, it may prompt the BoE to implement another 25 bps rate hike, which would benefit the pound. Despite expectations that the pound may weaken in the next few weeks due to the US debt crisis, it could potentially appreciate back to near the 1.26 level if the Fed signals more dovishness at its June meeting

Source: Kenanga Research - 16 May 2023