Pound Sterling Eyes 2023 High against Euro Amidst Fresh U.S. Dollar Onslaught

Image © Adobe Images

It's all about the Dollar at present with the May rebound catching Pound Sterling and the Euro in the crossfire.

The Euro is proving particularly vulnerable to the Dollar's rise with EUR/USD shedding nearly two-thirds of a per cent on Thursday alone, taking the Euro's loss this May to 2.0%.

"The dollar has strengthened against its major rivals over the past two weeks, gaining 2% against a basket of major currencies. The Dollar Index surpassed 103, a level not seen since the second half of March," says Alex Kuptsikevich, senior market analyst at FxPro.

By contrast, the British Pound is looking slightly less exposed to Dollar strength with GBP/USD sliding half a per cent on the day and 1.0% on the month.

A faster decline in EUR/USD than in GBP/USD means a steadier performance in the GBP/EUR cross-exchange rate.

(In practice, any currency exchange in which neither of the currencies is the U.S. dollar is considered a cross rate. When a cross-currency pair is traded, two transactions are actually involved. The trader first trades one currency for its equivalent in U.S. dollars. The U.S. dollars are then exchanged for another currency.)

Given the Pound's apparent ability to withstand the Dollar's onslaught to a greater degree than the Euro, we observe that the Pound to Euro exchange rate has increased in value to 1.1525.

This takes the exchange rate to within a touching distance of its 2023 high at 1.1544.

Above: GBP/EUR (top) and EUR/USD.

Driving the Dollar higher was a set of stronger-than-expected U.S. data that suggests the U.S. Federal Reserve has the option to raise interest rates again in June.

This presents a surprise to markets that were all but convinced the Fed had ended its hiking cycle.

"Notably, the rally in the US currency has been accompanied by a rally in equity indices, an odd couple. The dollar is rising, along with the chances of another rate hike in the middle of next month. The market is now pricing in a 30% chance of another hike, up from almost 0% at the start of May," says Kuptsikevich.

Data that drove the latest leg higher in the Dollar includes the release of the Philadelphia Federal Reserve's Manufacturing Index for May, which read at -10.4, less severe than the -19.8 the market expected.

Meanwhile, Initial Jobless Claims read at 242K, which was surprisingly less than the 254K the market expected.

The Dollar appears to also be benefiting from expectations U.S. politicians will reach an agreement to allow for the lifting of the debt ceiling

Given recent evidence, and in the absence of any UK-specific data, we would expect GBP/EUR to extend higher should the Dollar's rally extend further and exact a greater toll on the Euro.