US Dollar Dictating Marker Movements (EUR/USD, GBP/USD), BoE Introduce Further Tax Cuts (EUR/GBP)

Summary:

• The Euro remains a weak currency and appears to be headed for additional declines.
• GBP attempted to stabilize and recover the majority of its losses from the flash crash.
• BoE current monetary policy will probably lead to escalating inflation pressures.

EUR/USD at lowest level in more than 20 years

The market is reflecting mixed signals for this currency pair. According to their most recent research, the German Ifo institute is the latest organization to issue a warning that the nation is likely to experience a recession in the upcoming quarters due to businesses' elevated level of pessimism for those months. The figures released today fell short of forecasts and numbers from the previous month. The Ifo report is the first of many German publications scheduled for this week that will provide a clearer picture of the status of the German economy. Earlier in the session, the US dollar's strength led to the Euro falling to its lowest level versus the US dollar in more than 20 years. The Euro remains a weak currency and appears to be headed for additional declines, while market movements are being dictated by the dollar across the board.

✕ EUR/USD Price Chart

EUR/GBP bearish

The market is reflecting bearish signals for this currency pair. According to a top economic research agency, the Bank of England must take the initiative and raise UK interest rates significantly if the collapse of the British Pound is to be stopped. The Pound has declined in value relative to every other currency in the globe, with the Pound to Euro exchange rate falling below 1.10. The British pound is currently stabilizing and recovering the majority of its losses from the flash crash. The projections for the British pound have been drastically cut by investment firm Goldman Sachs, indicating that additional losses against the Euro and a revisit of recent lows against the Dollar are possible.

✕ EUR/GBP Price Chart

GBP lost 4.8%

The market is reflecting bullish signals for this currency pair. This morning's Asian trading, which is often characterized by low transaction volume and little price volatility, saw an unusually steep decline in the British pound of over 4.8%. The big price change may have been influenced by the low transaction volume (reduced liquidity), but the main driver was the UK's new Chancellor Kwasi Kwarteng's announcement of more tax cuts, the largest in 50 years!

Looking at the Bank of England's (BoE) current monetary policy, it is clear that the institution wants to raise interest rates to combat the inflation issue; however, a lax fiscal policy, such as energy price caps, which may benefit consumers in the short term, will probably lead to escalating inflation pressures in the medium and long terms once the fiscal support is removed. The local currency's decline, which makes inflation prone to increases, is a further contributor to the issue.

✕ GBP/USD Price Chart

Sources: finance.yahoo.com, dailyfx.com, poundsterlinglive.com