Traders are reconsidering their attitude to the dollar after two important events — the Fed meeting and the publication of disappointing GDP. This gives a head start to the other major currencies — the euro and pound sterling. The Japanese yen showed bright dynamics at the end of the week, while the British pound has good potential. The euro is also trying to keep up, especially as there are new arguments for a large-scale and rapid increase in rates by the ECB. Also, the euro and pound sterling should not be underestimated by American businesses.

So, the dollar index fell below 106 on Friday, the lowest in more than three weeks. The U.S. economy is contracting for the second straight quarter, heightening fears of a recession and raising expectations that the Fed will have to slow the pace of rate hikes.

It is worth noting that the dollar has retreated from its 20-year high of 109.3 reached in mid-July, and is on track to decline for the second week in a row.

Dollar bulls are trying to hold off the 106.00 area at the end of the week. If the index breaks above that level, we could see a move to the 2022 high near 109.40. At the same time, an attack of additional weakness could bring the dollar down to 104.70. Therefore, the euro and pound sterling against the dollar strengthened. 

The momentum of the euro growth today was given not only by the weak dollar, but also by the domestic component. GDP growth and inflation reports were released, which surpassed analysts’ estimates. Inflation does not seem to have peaked, as consumer prices accelerated in July to a new record high of 8.9%. Against this background, the difference between the euro and the pound sterling has shrunk. 

What will be the exchange rate between the euro and the pound sterling?

As for economic growth, preliminary data showed a 0.7% quarter-on-quarter increase exceeding market expectations for a 0.2% gain. Reports from France and Spain surprised with growth, while Germany’s economy unexpectedly stalled. On an annualized basis, GDP rose 4% vs. the forecasted 3.4%. Thus, market players have more arguments in favor of a more aggressive approach by the ECB.

How will this help the euro? With a strong dollar and a recession expected in the region next year — nothing. Wells Fargo is pessimistic about the euro’s prospects. They expect the EUR/USD exchange rate to fall to 0.9600 or below. The ECB is likely to have a relatively limited cycle of policy tightening. The situation with a potential recession is exacerbated by restrictions on Russian gas supplies and concerns about rationing of gas consumption in the eurozone this winter.

Economists expect the eurozone economy to shrink by 0.2% in 2023

However, Friday’s data may briefly support the EUR/USD pair, which gained bullish momentum and rose above the key level of 1.0230. The sellers are staying away for now.

If 1.0230 proves to be support, the next target for bulls may be 1.0300 and 1.0370. In case of breakdown of 1.0230 additional losses may be observed in the direction of 1.0200 and 1.0150.

The Euro, as well as the Pound, are the currencies that have had disappointing results this year. However, they can start a strong series of recovery against the dollar if there is more evidence of problems in the U.S. economy.

Is pound sterling the strongest currency today?

GBP/USD will be in the spotlight for the next week and a half. The markets will pay attention to the pound due to the next meeting of the Bank of England. Please be reminded that the previous approach of the CB to increase interest rates (by 25 bps) was strongly criticized as the inflation rate in the UK has grown to a new 40-year high of 9.4%.

Traders now wonder if it will join the rest of the central banks known for raising 50 bps or more on Thursday. It is worth noting that the current situation is far from peak euro pound sterling historical exchange rates. 

If that happens, the GBP/USD might hit 1.2500 by next Friday, especially if the U.S. macro data is weakening in parallel.

Commenting on the current situation, analysts stated that GBP/USD rose for the second week in a row after the exit of the descending wedge pattern upwards. The short-term path of least resistance is directed upward. The pair should strengthen the bullish rush and move higher.

Short-term support, at 1.2090, is expected to keep GBP/USD from a possible failure.