In worrying times like this, it is important for us to point out that we completely acknowledge the wider implications of international conflict. Our principle duty as a company is to ensure that our clients are aware of all of the factors that affect currency exchange rates, which sadly sometimes includes war. Our thoughts are with everyone who is being affected by this escalating situation, and our currency updates do not intend to diminish, ignore or undermine the true impacts of this conflict.

As the Russia – Ukraine conflict intensifies, the pound will remain vulnerable with investors preferring safe-haven currencies such as the US dollar, at least in the near term.

Russian president Vladimir Putin has responded to what he has called “aggressive statements” by NATO countries by ordering his military to put nuclear deterrence forces on high alert. The order was condemned by the US which stated that the Russian president was “manufacturing threats that don’t exist in order to justify further aggression.”

How markets have responded

The rouble is expected to plummet at least 25% on Monday, reflecting the strict sanctions announced by the US and European Union over the weekend. The European Central Bank said on Monday morning that Sberbank Europe, which is a fully owned subsidiary of Sberbank Russia, and is majority owned by the Russian state, is expected to fail.

Crude oil and gas prices are soaring in response to the economic sanctions against Russia. Markets are worried that Russia could turn off its gas supplies to Europe, but Gazprom said it was shipping gas to Europe via Ukraine. A spokesperson for Germany’s largest power producer RWE, which receives gas from Gazprom, confirmed to Reuters that gas was flowing from Russia as normal.

Other commodities have also risen. Aluminium reached a new high on the London Metal Exchange. Chicago wheat futures had their biggest one-day gain in a decade, corn prices rose 4% and soybeans were 2.6% higher. According to Reuters, Russia and Ukraine together account for almost 30% of global wheat exports and a fifth of the world’s corn supply.

Spot gold was up to $1,901 an ounce as investors turned to safe-haven assets, including the dollar.

Ukraine and Russia talks have begun

Talks between Ukraine and Russia have begun, and Ukraine has said that it hopes for an “immediate ceasefire and withdrawal of Russian troops” following the negotiations. Its delegation includes high-ranking officials, but not its president Volodymyr Zelenskiy.

The Kremlin has declined to comment on the expected outcome of the negotiations, but Russian negotiator Vladimir Medinsky has said Russia wants to reach an agreement that will be to the benefit of both sides.

UK economic outlook

With the ongoing war and international sanctions against Russia, economists have revised lower their UK economic growth forecasts with initial assessments showing that the UK has little direct exposure to Russia. The main economic problems are the surging oil and gas prices.

The outlook for the UK economy is now gloomier due to the Russian invasion of Ukraine and Chief UK economist at Pantheon Macroeconomics, Samuel Tombs has said that they have hiked their forecast for the peak rate of CPI inflation in April to 8.0%, from 7.7%.

The UK economy won’t be hugely impacted from UK and international sanctions on Russia as analysts at Capital Economics say that only $3 billion (0.1%) of the UK banking system’s foreign claims are engaged in Russian banks, much smaller than those of Germany, France and Austria. Bank of England Governor Andrew Bailey also said last week to the Treasury Committee that "the UK banking system’s exposure to Russia is very low."

UK Business and Energy Secretary Kwasi Kwarteng on Monday said "unlike Europe, we're not reliant on Russian gas. But like others, we are vulnerable to high prices set by markets."

If there is no breakthrough in peace negotiations, commodity prices will rise sharply. With higher gas prices and global food prices rising, a small depreciation of Sterling will also boost the overall CPI inflation, said Samuel Tombs.

The Bank of England will be sensitive to any further signs that higher inflation will boost higher price expectations or faster wage growth. Capital Economics expects the inflation outlook to prompt further hikes to 1.25% this year. But Pantheon Macroeconomics remains cautious as it believes UK wages will struggle to keep up with inflation. They expect the Monetary Policy Committee to increase the Bank Rate only to 1.00% by the end of this year.

As the Russia – Ukraine conflict intensifies, the pound will remain vulnerable with investors preferring safe-haven currencies such as the US dollar, at least in the near term.

Russian president Vladimir Putin has responded to what he has called “aggressive statements” by NATO countries by ordering his military to put nuclear deterrence forces on high alert. The order was condemned by the US which stated that the Russian president was “manufacturing threats that don’t exist in order to justify further aggression.”

How markets have responded

The rouble is expected to plummet at least 25% on Monday, reflecting the strict sanctions announced by the US and European Union over the weekend. The European Central Bank said on Monday morning that Sberbank Europe, which is a fully owned subsidiary of Sberbank Russia, and is majority owned by the Russian state, is expected to fail.

Crude oil and gas prices are soaring in response to the economic sanctions against Russia. Markets are worried that Russia could turn off its gas supplies to Europe, but Gazprom said it was shipping gas to Europe via Ukraine. A spokesperson for Germany’s largest power producer RWE, which receives gas from Gazprom, confirmed to Reuters that gas was flowing from Russia as normal.

Other commodities have also risen. Aluminium reached a new high on the London Metal Exchange. Chicago wheat futures had their biggest one-day gain in a decade, corn prices rose 4% and soybeans were 2.6% higher. According to Reuters, Russia and Ukraine together account for almost 30% of global wheat exports and a fifth of the world’s corn supply.

Spot gold was up to $1,901 an ounce as investors turned to safe-haven assets, including the dollar.

Ukraine and Russia talks have begun

Talks between Ukraine and Russia have begun, and Ukraine has said that it hopes for an “immediate ceasefire and withdrawal of Russian troops” following the negotiations. Its delegation includes high-ranking officials, but not its president Volodymyr Zelenskiy.

The Kremlin has declined to comment on the expected outcome of the negotiations, but Russian negotiator Vladimir Medinsky has said Russia wants to reach an agreement that will be to the benefit of both sides.

UK economic outlook

With the ongoing war and international sanctions against Russia, economists have revised lower their UK economic growth forecasts with initial assessments showing that the UK has little direct exposure to Russia. The main economic problems are the surging oil and gas prices.

The outlook for the UK economy is now gloomier due to the Russian invasion of Ukraine and Chief UK economist at Pantheon Macroeconomics, Samuel Tombs has said that they have hiked their forecast for the peak rate of CPI inflation in April to 8.0%, from 7.7%.

The UK economy won’t be hugely impacted from UK and international sanctions on Russia as analysts at Capital Economics say that only $3 billion (0.1%) of the UK banking system’s foreign claims are engaged in Russian banks, much smaller than those of Germany, France and Austria. Bank of England Governor Andrew Bailey also said last week to the Treasury Committee that "the UK banking system’s exposure to Russia is very low."

UK Business and Energy Secretary Kwasi Kwarteng on Monday said "unlike Europe, we're not reliant on Russian gas. But like others, we are vulnerable to high prices set by markets."

If there is no breakthrough in peace negotiations, commodity prices will rise sharply. With higher gas prices and global food prices rising, a small depreciation of Sterling will also boost the overall CPI inflation, said Samuel Tombs.

The Bank of England will be sensitive to any further signs that higher inflation will boost higher price expectations or faster wage growth. Capital Economics expects the inflation outlook to prompt further hikes to 1.25% this year. But Pantheon Macroeconomics remains cautious as it believes UK wages will struggle to keep up with inflation. They expect the Monetary Policy Committee to increase the Bank Rate only to 1.00% by the end of this year.

In February 2022, Universal Partners FX announced their partnership with ABTA, the UK's leading network of travel businesses.

Principally, this underlines our commitment to the travel industry which has been through a torrid time over the past 2 years. As the industry looks set to recover this year, we are more determined than ever to support tour operators, airlines and travel agents through this next phase where 'pent up demand' is likely to see a sudden influx of bookings.

Whilst this is undoubtedly welcome news for the industry, it is also occurring at a particularly volatile time as the pandemic fades but geo-political tensions threaten to overspill into what could be a global conflict.

As a result, travel businesses are susceptible to currency volatility which could seriously undermine their recovery if the right strategy is not implemented.

Working with ABTA is above all else an honour for Universal Partners FX, knowing that our credentials and profile are at a level at which they feel we can add real value to their members. This sentiment was certainly at the forefront of what our Chairman, Dhaval Patel had to say:

"I am absolutely delighted to have partnered with ABTA as this has been a goal for some time. Travel is something we hold dearly here at Universal Partners FX, not just because it is vital for international business, but also because on a personal level we firmly believe it is essential to our development and understanding of the world we live in. ABTA members can be assured that they are getting the most hard-working and dedicated team imaginable, along with some of the finest FX analysts in UK. We will bend over backwards to ensure travel businesses can protect themselves from currency risk and enjoy a well earned period of success."

If you are a travel business wishing to simplify your international payments process or eliminate currency risk, you can get in touch via our website or by calling 0207 190 9559.

In worrying times like this, it is important for us to point out that we completely acknowledge the wider implications of international conflict. Our principle duty as a company is to ensure that our clients are aware of all of the factors that affect currency exchange rates, which sadly sometimes includes war. Our thoughts are with everyone who is being affected by this escalating situation, and our currency updates do not intend to diminish, ignore or undermine the true impacts of this conflict.

The GBP/USD pair dropped as traders preferred buying US dollars following reports that Russian forces have entered the Obolon district in Kyiv as the invasion enters day two. The incoming news surrounding the Russia-Ukraine conflict have kept investors on edge, which, in turn, offered support to the safe-haven greenback and attracted selling around the GBP/USD pair. Economists at Société Générale expect the GBP/USD to enjoy a rebound. However, looking at the recent market action, the pound is one of the more vulnerable currencies in the face of the Russia-Ukraine war and unless the market mood improves ahead of the weekend, the pound will remain under pressure.

Prime Minister Boris Johnson’s call to disconnect Russia from the SWIFT global payment system should limit any optimistic move in the markets and will weigh on the pound to US dollar exchange rate. Bruno Le Maire, the French Minister of the Economy, Finance and the Recovery, said that cutting off Russia from SWIFT is a possibility, but this would be as a last resort. Germany, Italy and a number of other European nations which rely heavily on Russia for gas opposed the sanction.

Russia - Ukraine conflict escalates

The general staff of the armed forces of Ukraine has said Russia is using the Gomel airfield in Belarus in preparation of an assault on Kyiv after the Hostomel military airport near the capital was damaged. In a statement, the military department said on Facebook that Russian forces were advancing on the city from several directions as Ukrainian forces fought around Mariupol in the south and Kharkiv in the north-east of the country.

Al Jazeera’s Andrew Simmons, reporting from Kyiv, says the situation is rapidly “escalating in every respect”: “That is not just in the air but on the ground as well – there are armoured [Russian] columns heading towards the city. There is real anger in the air … and the hatred for [Russian President Vladimir] Putin is palpable. Furthermore, there are a number of places in the city where people can get a gun of their choice, particularly an AK47, to defend themselves and that is the policy of the presidency. Zelenskyy wants everyone to fight.” He added: “What we are going to find is that when these Russian forces reach the capital there is likely to be fierce resistance. The overall mood is one of horrendous fear of what’s going to happen next.”

UK Sanctions

The UK announced sanctions on Russia late Thursday, denying the country access to the City of London and intending to freeze all major Russian banks’ assets and exclude them from the UK financial system. As a result, the pound could weaken as funds could be repatriated by potentially sanctionable individuals, analysts have warned. With Russians holding significant UK assets analysts expect the pound to be under pressure.  

Prime Minister Johnson said there was a possibility to remove Russia from the Swift international payment system, which could also act as a headwind for the pound. Sterling will remain at risk of an exit of money flows.

 

 

In worrying times like this, it is important for us to point out that we completely acknowledge the wider implications of international conflict. Our principle duty as a company is to ensure that our clients are aware of all of the factors that affect currency exchange rates, which sadly sometimes includes war. Our thoughts are with everyone who is being affected by this escalating situation, and our currency updates do not intend to diminish, ignore or undermine the true impacts of this conflict.

 

Russia has invaded Ukraine in the early hours of the morning as markets are convulsing following the news. Ukraine’s foreign minister Dmytro Kuleba condemned the invasion as a “war of aggression” and called the world to stop Putin, saying “the time to act is now.” US president Biden denounced the attack while a UK foreign office minister promised that the UK will impose “unprecedented” sanctions to punish Russia’s “appalling decision” to invade Ukraine.

Outlook for the pound

The outlook for the GBP/USD pair remains mixed but analysts have noted that the pair will trade within a stable range in the next few weeks. GBP has a higher correlation with risk, but so far, it has managed to hold up and is slightly lower against the US dollar.

Financial analysts have also highlighted how the pound tends to rally alongside such safe-havens as the yen and franc during times of Ukraine-centric tensions and falls alongside these currencies when tensions recede.

Early on Thursday morning, GBP/USD dropped to a near four-week low as traders turned to the safe-haven US dollar, following Russia’s invasion of Ukraine, but managed to recover some of its losses soon after.

Invasion of Ukraine

Investors are on the edge after Russian President Vladmir Putin ordered a “special military operation” at dawn and reports show that there are explosions all over the country, near major Ukrainian cities, including the capital Kyiv. World leaders have warned that this could become the biggest war in Europe since 1945.

Markets’ reaction

The invasion of Ukraine has created uncertainty as markets are in turmoil, with the safe-haven US dollar and Japanese yen gaining ground alongside gold and oil. Stocks and risk currencies are dropping fast.

US president Joe Biden said that the United States and its allies will impose “severe sanctions” on Russia.

The rouble hit a record low of 89.60 against the dollar, and the Moscow stock exchange is temporarily suspended, but will reopen at 10am GMT. Russian sovereign dollar bonds are selling off.

Sterling has been considered a relative safe haven amidst Ukraine-Russia risks and this can be seen by the higher pound to euro exchange rate.

Markets are now considering severe sanctions with the most serious being the sanction against Russia that would involve banning Russian crude and gas from international markets. This will affect economies battling high inflation.

The pound will continue to struggle as the war in Ukraine continues and drives demand for the safe-haven US dollar.

Putin’s warning

In his televised address at 5am, Putin claimed “A hostile anti-Russia is being created on our historic lands.” For this reason, he explained, “We have taken the decision to conduct a special military operation,” focused on the “demilitarisation and denazification” of Ukraine. “We do not intend to occupy Ukraine,” he said and sent a warning to other nations: “To anyone who would consider interfering from the outside: if you do, you will face consequences greater than any you have faced in history. All relevant decisions have been taken. I hope you hear me.”

Thursday’s attack was preceded by a large-scale continuous cyber-attack that targeted Ukraine’s ministries and banks to create confusion.

The pound has fallen against the US dollar and could face additional pressure if tensions between Russia and Ukraine increase. The pound has risen against the euro, despite the fact that the British currency is sensitive to changes in risk sentiment. The euro has been more sensitive to the current political climate as Europe relies heavily on Russian gas.

Rising tensions between Russia and Ukraine

Following Russia’s move to send troops into eastern regions of Ukraine overnight with the purpose of “peace keeping”, the pound to euro exchange rate has risen. On Monday night, Russian president Vladimir Putin ordered his military to enter the Russian-controlled territories of Donetsk and Luhansk which he recognised as independent states.

The formal recognition signals an end to the seven-year peace deal known as the Minsk agreement and could give the Russian leader a pretext to invade Ukraine.

Western leaders condemned Putin’s move, with some announcing sanctions, and others holding emergency meetings. Boris Johnson is chairing a meeting of the UK’s emergency Cobra committee on Tuesday to sign off a package of sanctions against Russia.

Why is Russia interested in Donetsk and Luhansk?

The two self-proclaimed rebel republics of Donetsk and Luhansk escaped Kyiv’s control in 2014 and have been in armed conflict with Kyiv’s army since 2014. Their independence is not recognised by the international community. Kyiv and the West say Russia initiated the eastern uprising, by providing arms and placing troops across the border to reinforce them.

Moscow, on the other hand, claims that the Donbas region, a large part of eastern Ukraine, is Russian speaking and needs to be protected from Ukrainian nationalism. On Monday, during his 1-hour televised address, Putin said that “Ukraine has never had its own authentic statehood,” and sought to undermine the idea of Ukraine as an independent nation. Moscow also sees Ukraine as a buffer zone to NATO, which was founded in 1949 to protect against Soviet aggression.

Ukraine's Ambassador to the UK Vadym Prystaiko told BBC Newsnight: "I was listening to Putin for almost an hour, an historic debate with himself. And I have to tell you when a nuclear nation is calling your nation a historical mistake which has to be fixed, you have to be worried about what he has in mind."

How does this affect markets?

Given the nature of the situation and how fast things are changing, markets and the euro will remain  volatile in the near-term.

Investors will be interested in the scale of the sanctions, as severe sanctions could affect the supply of Russian gas and oil to the global economy. Europe which relies heavily on Russian gas would be exposed. Russia’s move against Ukraine has already increased the uncertainty around the economic outlook for the eurozone, according to the European Economic Commissioner Paolo Gentiloni.

Any further significant deterioration could weigh on the euro and help the pound rise against the single currency.  If Putin’s ambitions are controlled and he doesn’t wish to extent military action further, then the euro should recover.

 

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help, efficient risk management and tailored solutions to your business’ transfer needs.

The pound has gained against the US dollar on Monday due to positive risk sentiment and the release of the Markit Manufacturing and Services PMI data for February. The PMI data has revealed that business activity in the UK private sector has continued to expand at a robust pace in February.

Markets and investors are optimistic that a diplomatic solution to the Russia-Ukraine crisis can be found. Later in the week, US President Joe Biden will meet his Russian counterpart Vladimir Putin. Over the weekend, however, various news channels reported that the US received information that Russia was preparing for military action against Ukraine. If geopolitical tensions escalate, this could weigh on the British pound.

IHS Markit PMI surveys

The UK economy bounced back in February, according to the latest IHS Markit PMI surveys. UK business activity was the strongest since June. With consumer spending increasing as the pandemic restrictions loosened, sectors such as travel, leisure and entertainment saw the highest activity. The flash UK Composite Output index for February came at 60.2, the flash UK services business activity index for February came at 60.8 and the flash UK manufacturing output index came at 57.3.

The PMI surveys also showed that high inflation persisted in February, with higher wages, energy bills and raw material costs pushing businesses’ operating costs higher.

Markit said: “The overall rate of input cost inflation was the steepest since last November and the second-highest since the index began in January 1998. This resulted in another sharp increase in average prices charged by private sector firms, although the latest rise was softer than at the start of the year.”

Bank of England interest rate hike in March

Chris Williamson, chief business economist at Markit, said that the Bank of England could deliver another interest rate hike as soon as March: “With the PMI’s gauge of output growth accelerating markedly in February and cost pressures intensifying to the second-highest on record, the odds of an increasingly aggressive policy tightening have shortened, with a third back-to-back rate rise looking increasingly inevitable in March.” Williamson has also warned that the rising cost of living, higher energy prices and uncertainty could affect the demand outlook and that both the manufacturing and services sectors would need to be closely watched.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said she was reviewing her forecast for UK GDP growth in the first quarter up to 0.6%, and added that the Bank of England will “almost certainly” raise interest rates in March. She noted that the sharp rise in the composite PMI in February indicates that the economy is recovering from Omicron.

JPMorgan economist Allan Monks noted the surge in the UK PMI data and said that while growth is not the Bank of England’s main focus at the moment, February’s PMI indicates “strong momentum in growth ahead of a set of headwinds that are due to intensify from April. To the extent this momentum limits damage to the labour market, we believe that it will further encourage the BoE to continue normalising rates in the coming months.”

 

 

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help, efficient risk management and tailored solutions to your business’ transfer needs.

 

 

The pound strengthened against the US Dollar following better than expected retail sales for January.

Retail sales for January

According to the Office for National Statistics (ONS), UK retail sales rose 1.9% month-on-month in January, beating expectations for 1.0% as well as December's reading of -4.0%. Retail Sales rose 9.1% year-on-year in January, surpassing expectations for 8.7% as well as December's reading of -1.7%.

Despite the squeeze from inflation, retail sales have bounced back as consumers returned to the high street after the Omicron variant impacted the economy.

The recovery was based on increased spending at non-food stores such as household goods and garden centres. Department stores reported a monthly increase of 7.1% in sales volumes but were 8.0% below their February 2020 levels. Clothing stores reported a fall of 5.0% in January as January sales were not as generous.

As the ONS said: “Household goods stores sales volumes rose by 7.5% in January 2022 because of strong growth in furniture and lighting stores (16.6%) and electrical goods stores (16.0%). Sales volumes were 3.8% above their February 2020 levels.”

High inflation

The increase of activity in January comes at a time of inflationary pressures, with the ONS reporting the highest inflation reading in 30 years. Founder of ShopAppy Dr Jackie Mulligan said: "After a truly dire December, it's encouraging that things appeared to start picking up in January. Long may it continue. However, inflation and the cost of living crisis are hitting small high street businesses from all angles. Customers have less to spend, raw materials are costing more, supply chains are being squeezed, interest rates are on the up and the cost to heat their premises is skyrocketing."

Bank of England

The Bank of England raised interest rates in February in an effort to control inflation and financial markets have priced in another rate hike in March. More than 125 basis points of rate hikes are now priced for the UK over the rest of 2022. The prospect of further interest rate hikes from the Bank of England has helped support the pound over the new year but the economic outlook is yet not clear, as inflation continues to rise.  

The pound has been supported this week by the release of the jobs and wage figures which attest to the market being tight. Bank of England rate hikes are linked to higher inflation, and as long as the macroeconomic data shows a strong market then further rate hike expectations will also support Sterling.

However, some foreign exchange strategists have warned that the market is now pricing in more rate hikes from the Bank of England than they will deliver, and any disappointment could limit gains for the pound. The Bank has also been criticised for its plans to raise rates as it could endanger a struggling economy that is still fighting the effects of the pandemic and could create the conditions for a recession.

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help, efficient risk management and tailored solutions to your business’ transfer needs.

Sterling could record new gains against the US dollar in the coming weeks as more economic releases support expectations for Bank of England (BoE) tightening.

FX Strategists at UOB Group, have noted that the pound rose more than expected yesterday and this upward momentum could continue unless the British currency falls within the next couple of days.

However, the persistent Russia-Ukraine tensions will continue to impact on both the pound to euro and the pound to US dollar exchange rates.

GBP/EUR and GBP/USD: Ukraine-Russia tensions

The pound could maintain an upward trend against the euro, but analysts believe that the euro will prevail. The main driver for the pound to euro exchange rate is the Ukraine-Russian situation. The last week, we have witnessed the pound rising and falling, before recovering as news on the geopolitical tensions created volatility.  On Wednesday, optimism returned to markets but soon faded as it was made clear that nothing has changed and that over 120K Russian troops were still stationed on Ukraine's borders with little progress having been made.

This is why the pound to euro exchange rate will move according to news and speculation relating to the Ukraine-Russia issue.

The uncertainty about the Russia-Ukraine conflict will also put the pound to US dollar exchange rate at risk. Reports claiming that Ukraine has bombed separatists' positions in east Ukraine caused safe-haven flows to dominate the markets. Ukraine denied these claims and the Ukrainian military reported that Russian occupying forces fired on a village in the Luhansk region. A senior White House official said that Russia’s claim that is moving troops away from Ukraine’s border is false. He also warned that Russia could launch a false pretext to invade Ukraine at any moment. These developments have soured market mood as investors remain on edge.

A further escalation of geopolitical tensions could weigh on GBP/USD while a positive shift in risk sentiment will boost the pound.

European Central Bank

The turn in the European Central Bank’s policy which was announced on their 3rd of February update has supported the euro. The ECB said that due to inflationary pressures they would no longer be against a rate hike in 2022, which has led the market to price in a number of 10 point hikes to the Deposit Rate, that would take it back to 0% by the end of 2022. For the GBP/EUR currency exchange rate, what will determine its performance will be the timing of monetary policy tightening in relation to that of the Bank of England.

Foreign exchange strategists at HSBC believe that the euro will rise against the pound as they see  the Bank of England disappointing market expectations. They said: "We think there appears to be room for the Bank of England to disappoint relative to market pricing, which has more than a 50% chance of a 50bp hike.”

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help, efficient risk management and tailored solutions to your business’ transfer needs.

 

The pound strengthened for a second successive day against a weaker US dollar as the positive risk mood weighed on the greenback. The release of stronger UK CPI offered support to the British pound.

The pound strengthened following Tuesday's stronger UK wage growth figures and better than expected UK consumer inflation data released this Wednesday. The headline UK CPI reached to 5.5% YoY rate in January while the core CPI, which excludes food and energy prices, rose to 4.4% YoY from. The positive releases have reinforced the case for additional monetary policy tightening by the Bank of England.

Any potential tensions over the Northern Ireland Protocol could limit further gains for the pound while the possibility of a 50 bps Fed rate hike in March should limit USD losses. For the US dollar, the main driver for Wednesday will be the FOMC meeting minutes.

UK Inflation data

UK inflation has hit a new 30-year high, which means that households will be burdened with the cost-of-living squeeze. Data released on Wednesday by the Office for National Statistics revealed that consumer prices rose by 5.5% in the 12 months to January, which marks the highest reading since March 1992 and is above the Bank of England’s 2% inflation target. Higher energy costs and transport costs helped to push inflation higher.

Chancellor of the Exchequer, Rishi Sunak, has responded to the inflation data by recognising the pressures that people will face as the cost of living rises. He said that “These are global challenges, but we have listened to people’s concerns and recently stepped in to provide millions of households with up to £350 to help with rising energy bills. We’re also helping people on the lowest incomes keep more of what they earn by cutting the Universal Credit taper rate, and freezing alcohol and fuel duties to keep costs down. In total we’re providing support with the cost of living worth over £20bn across this financial year and next.”

Prices for goods

The ONS said that various goods prices’ including those for clothing and footwear, housing and household services and furniture and household goods pushed up inflation in January. Electricity prices rose by 19.2% over the last year, while gas prices rose 28.3%. The squeeze will be felt even more this spring, when the energy price cap is lifted by 54%, and national insurance contributions rise. Furniture and household goods’ prices rose by 8.5% over the year, the highest since January 1989.

Interest rates to rise

Economists believe that interest rates will rise further, as inflation reaches 7.9% in April, adding more pressure on households. Ed Monk, associate director at Fidelity International, explained: “The pace of price rises has put the Bank of England on a much more hawkish footing and a third month in a row of interest rates rises now looks likely in March. That will, of course, squeeze borrowers even more and will add headwinds for the UK economy which has only recently managed to regain the ground lost to the pandemic.”

 

The Bank of England warned this month that consumer price inflation could reach at around 7.25% by April as increasing energy prices reach consumers.

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help, efficient risk management and tailored solutions to your business’ transfer needs.

 

The pound is lower against both the euro and the US dollar following a stronger US dollar, as well as geopolitical and Brexit concerns. The main highlight for the week in terms of UK data will be the important inflation report this Wednesday which could support a Bank of England rate hike. With developments around Ukraine and January’s inflation data on the horizon, the pound could potentially be at risk. On Monday, rising fears of an imminent Russian attack on Ukraine triggered a global share sell-off and pushed oil prices higher.

Brexit

UK Foreign Secretary Lizz Truss has been criticised for granting too much ground to the EU in the ongoing negotiations over the Northern Ireland Protocol. In the latest round of talks, the Foreign Secretary is reported to have hinted that Britain would accept customs controls on goods intended for sale only in Northern Ireland. According to the Financial Times, the verbal offer was “so sensitive” it has not yet been put to paper. Truss’s latest concession about accepting some checks on trade within the UK contradicts the Government’s former position.

Pro-Brexit businessman and former MEP Ben Habib said that Truss’s suggestion represented a “complete collapse” in the Government’s position. Habib said: “If true, Ms Truss’s latest concession to the EU, to accept limited customs checks for goods from GB destined for use in Northern Ireland is a disaster.” He added: “It would signify a complete collapse in the British position and a preparedness to set in stone customs checks across the Irish Sea. Customs checks which the Government itself decried in its Command Paper last July.” The news, concerns over the Northern Ireland (NI) border checks and the lack of progress in the talks could weigh on GBP/USD prices.

PM Boris Johnson

Scotland Yard are in the process of contacting more than 50 people who have been present in the lockdown events in Downing Street. Boris Johnson has been contacted by the Metropolitan Police as part of the probe into lockdown parties held in Downing Street and across Whitehall. The formal questionnaire is understood to have been received after 9.30pm on Friday night. This could also add to political fears and weigh on GBP/USD prices.

Covid-19 and “Deltacron”

Another potential risk for the pound is news that health officials in the United Kingdom have begun monitoring a hybrid strain of the delta and omicron coronavirus known as "Deltacron" last week. While initially the mutation was dismissed, officials are now considering it as a real threat.  

Russia Ukraine tensions

Tensions between the two countries are high, with Washington warning that Russia could attack Ukraine at any time. Moscow has amassed more than 100,000 troops near Ukraine’s borders, while a senior Russian military official said on Monday that Russia was ready to open fire on foreign ships and submarines that enter its territorial waters.

BoE rate hike

The Bank of England will raise interest rates faster than previously expected to control surging inflation, according to economists polled by Reuters.

Sterling could rise on Wednesday when we get the release of inflation figures for January. Market participants expect a surprise on the upside and a more aggressive interest rate response from the Bank of England (BoE) over the coming months. CPI inflation is forecast at 5.4%, but investors have said a pleasant surprise on the upside could be a possibility.

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