Pinch, punch, first of the month. How is it August already?? Happy Thursday and rate cut day! Only our second Market commentary in this series and we already have an Interest Rate cut in the UK; WOW.

We are pleased to bring you the latest insights in our new series of our FX Weekly Update, keeping you informed of key economic news and events impacting the Currency markets. I have tried to add in some notes below which might help with understanding the economics of these decisions although I didn't do that well in School, so I hope they make sense 😆.

Key Updates:

• British Pound (GBP): The Bank of England (BoE) has cut interest rates for the first time in four years, reducing the base rate from 5.25% to 5%. This move aims to provide relief to mortgage holders and stimulate economic growth amid concerns over a slowing economy. GBP has initially faced some pressure following the rate cut with the Pound falling against major currencies as the market weighs up the implications of this policy change. Governor Andrew Bailey is speaking currently mentioning the decision was on a fine line and the fact the BoE needs to be careful in how quickly they continue to cut rates.
  
  NOTE: The reduction in interest rates typically leads to a weaker currency as lower rates reduce the return on investments denominated in that currency, making it less attractive to foreign investors​.
  
  
• US Dollar (USD): The US Dollar Index (DXY)  ended the week relatively unchanged. Strong retail sales and industrial production figures initially boosted the USD, but Fed Chair Jerome Powell’s comments on a data-dependent approach to future rate hikes tempered gains.
• Euro (EUR): The Euro saw weaker-than-expected Eurozone CPI data and cautious remarks from ECB President Christine Lagarde about the region’s economic growth prospects.
• Emerging Markets: In the last week, mixed performance was seen in emerging market currencies. The Chinese Yuan (CNY) and Indian Rupee (INR) gained ground, while the Brazilian Real (BRL) and South African Rand (ZAR) faced pressure due to political uncertainties and economic challenges.

GBP (extended for the Rate Cut)

The Bank of England (BoE) has cut interest rates for the first time in four years, reducing the base rate from 5.5% to 5%. This rate cut is the first since 2020, a period marked by the COVID pandemic when central banks worldwide adopted aggressive easing measures to support their economies. Since then, the BoE had been on a tightening path to combat inflation, making this shift back to easing particularly significant.

Bailey emphasized that the decision to cut the interest rate to 5% was driven by the need to support the slowing economy. Bailey stressed that future monetary policy decisions will remain data-dependent. The BoE is prepared to adjust rates further if economic conditions require, but he emphasized the importance of taking measured steps to avoid destabilizing the economy.

Data: The BoE decided to cut the interest rate to 5% with Andrew Bailey mentioning he was driven by the need to support the slowing economy. Despite positive signs in the labour market, with unemployment at a low of 3.8% and wage growth at 3.9% YoY, other economic indicators suggested a need for stimulus.

Political Landscape: The interest rate cut has led to a mixed response in the markets initially. On the one hand, it is expected to reduce the monthly mortgage payments for many homeowners.​On the other, if inflation rises faster than expected due to the rate cut, the GBP could face additional pressure. ​The recent appointment of new cabinet members and shifts in government policy, especially related to economic growth and public spending, have also influenced market sentiment.

Outlook: The long-term impact of this rate cut will depend on how the economy responds to this policy change. If the rate cut successfully stimulates growth and maintains inflation within the target range, it could help stabilize the UK economy. However, continued monitoring of economic indicators and potential further policy adjustments will be crucial.

Note: The relative difference in interest rates between the UK and other major economies will continue to play a crucial role in determining the GBP's value. For instance, if other central banks, such as the Federal Reserve or the European Central Bank, maintain or increase their rates while the BoE cuts rates, the Pound could weaken further relative to those currencies​.

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USD

The US Dollar Index (DXY) remained volatile, ending the week flat despite initial gains from strong economic data.

Data: Retail sales increased by 0.6% in July, exceeding expectations of a 0.4% rise, while industrial production grew by 0.5%, also beating forecasts. These positive indicators suggest robust consumer spending and manufacturing activity in the US. However, the mixed signals from Federal Reserve Chair Jerome Powell’s speech, which emphasized a data-dependent approach to future rate hikes, created uncertainty.

Political Landscape: The US political scene remains crucial for the USD. Speculation about the Democratic nominee for the upcoming presidential election and ongoing debates over fiscal policy, including potential tax cuts and infrastructure spending, continue to influence market sentiment. Additionally, international trade tensions, particularly with China, remain a significant concern.

Outlook: The USD is expected to maintain its strength in the short term, especially if upcoming employment data and consumer confidence figures continue to show positive trends. However, any major political developments or shifts in Fed policy expectations could lead to significant market movements.

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EUR

The Euro remained under pressure this week, primarily driven by weak economic data from Germany and subdued inflation figures from the Eurozone.

Economic Data: Eurozone CPI data for July came in lower than expected at 1.4% YoY, fuelling concerns about deflationary pressures in the region. German industrial production also fell by 0.8%, missing expectations and highlighting ongoing struggles in the Eurozone’s largest economy.

Political Landscape: The Eurozone continues to face political challenges, including the ongoing discussions about fiscal policies among member states. Recent elections in several member countries have led to shifts in political priorities, impacting overall economic stability. Additionally, tensions between EU countries over energy policies and funding are contributing to market uncertainties.

Outlook: The EUR/USD pair may continue to face downward pressure if upcoming data, including the Eurozone’s GDP growth rate and Germany’s export numbers, disappoint. However, any signs of economic stabilization or unexpected positive data could provide some relief. Investors will also be keenly watching the ECB’s next meeting for any policy adjustments.

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If you need any advice or have questions about how these trends might affect your specific situation, don’t hesitate to reach out!

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