The USD continues to weaken despite geopolitical risks
The escalation in the Israel-Iran conflict saw the dollar gain very briefly, but it was less of a U-turn and more a pause at a zebra crossing. Part of the USD’s momentary rally was likely attributable to rising energy prices, but it raised questions as to whether safe haven considerations assisted. In any case, the market was quick to move on once the ceasefire was agreed, and dollar selling resumed. Many currencies, including sterling and the euro, have moved to new multi-year highs against the USD, which has endured its worst first half of a year in over five decades, in trade-weighted terms, that is.
GBPUSD now has 1.4000 firmly in its sights
For a brief moment, the geopolitical flare-up saw greater demand for protection against short-term USD strength, but options markets swiftly reverted to implying further dollar selling. Psychologically, 1.4000 in GBPUSD and 1.2000 in EURUSD feels like a big step, but we’re just a couple of percentage points from those levels now, and the market is struggling to find a reason to buy the dollar and stop the rot. Our economists think the USD will recuperate some of its losses though, in part driven by an assumed reluctance from the Federal Reserve (Fed) to reduce interest rates. Their forecasts retain end-2025 levels of 1.3500 in GBPUSD and 1.1700 in EURUSD.
GBP/USD
GBP/EUR
Notes: Forecasts are produced by Investec Economics and are for end-quarter
Central banks continue to follow various strategies while considering the potential impact of ongoing US policy decisions
The Fed is pursuing a ‘wait and see’ approach to the impact of tariffs, immigration and other administration policies before reducing interest rates further. There is a growing disparity of views on its rate-setting committee amid rumours that Donald Trump may announce his next Fed Chair nomination early. Jerome Powell is expected to serve until the end of his term in May 2026, but the Chair appointee may be able to steer from the back seat, so to speak. All we can assume for now is that the Fed acts based on the incoming economic data, which thus far has remained relatively solid. Hence, our economists maintain their forecast for just one further Fed rate cut this year, despite the market pricing in more.
Meanwhile, GBPEUR has resumed following interest rate differentials
The European Central Bank (ECB) looks to have concluded its rate-cutting cycle, viewing the transition back to the inflation target as “largely completed.” The Bank of England on the other hand continues on its ‘gradual and careful’ path lower, which looks likely to see another cut at August’s meeting. Both central banks are wary of the impact of US policy, and the USD remains the driving force in FX markets, but for now GBPEUR is back to basics. With Eurozone interest rate expectations rising and expectations for the UK falling following weaker economic data, GBPEUR has moved lower as the two currencies’ interest rate differential has narrowed. Our economists’ end-year forecast of 1.1500 is now not too far away.
GBPEUR falls in line with narrowing interest rate differentials
Sources: Bloomberg, Macrobond, Investec
Forecasts
Sources: Macrobond, Bloomberg, Investec
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Ria Selvaratnam
Head of Treasury Sales
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