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 pound was higher against the US dollar on Thursday, amid US dollar weakness and better-than-expected UK GDP.

The latest UK GDP figures have beat expectations and lent support to the pound. According to the ONS, the economy expanded by 1.3% during the final quarter of 2021 compared to the 1% estimated previously. UK Current Account deficit also fell to £7.3 billion in Q4 2021 compared to the revised reading of £28.9 billion in the previous quarter.

However, disappointing news have stopped further gains for the pound to US dollar exchange rate. The latest news about the war in Ukraine have shattered hopes for a diplomatic solution while the prospect of new Western sanctions against Russia, could also weigh on the pound and support the safe-haven US dollar.

In addition to this, due to the Bank of England’s softer and more cautious tone in regard to more interest rate hikes, the pound could fail to rise further against the US dollar.

Ukraine

According to a Kremlin spokesperson, there has been no breakthrough to the ongoing negotiations, while an adviser to Ukraine’s President said that Russia was moving forces from Kyiv to try and encircle troops and launch attacks in the eastern part of the country.

Market participants will closely watch any fresh developments surrounding the Russia-Ukraine conflict which will provide some momentum to the GBP/USD pair.

GDP Report

Britain’s economy grew faster than previously expected in the last three months of 2021 when the Omicron wave hit the economy. UK’s GDP rose by 1.3% in the fourth quarter from the previous three months, according to the Office for National Statistics.

The ONS said the rise was driven by human health and social work activities, including increased GP visits at the start of the quarter, coronavirus testing and tracing activities, and the extension of the vaccination programme. On the other hand, consumer spending growth was revised lower from 1.2% to 0.5%.

Paul Dales, senior UK economist at Capital Economics, said that the upward revision to GDP growth in the fourth quarter in 2021 was due to inventories, so is not as positive as it appears, while consumer spending was revised down. The squeeze on real incomes is already being felt, but the fall in the saving rate is providing support.

The data shows that the economy is only just 0.1% smaller than the Q4 2019 pre-pandemic level. The 9.4% fall in GDP in 2020 was revised to a smaller 9.3% fall, while the 7.5% rise in GDP in 2021 was revised down to a 7.4% rise. GDP growth will probably be around 4.0% this year, Dales said.

BoE

Financial analysts and strategists have commented on the Bank of England’s more dovish and cautious tone following concerns about economic growth due to the growing cost-of-living squeeze in the UK. The Bank of England has raised interest rates three times now and markets expect another one at their next meeting in May. Policymakers at the bank have become more cautious, especially after the war in Ukraine, with the prospect of a 50bp move having faded entirely due to a weaker growth outlook. Some analysts believe that there aren’t many more hikes to come, maybe maximum two more, despite market expectations for another five rate rises this year.

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 pound fell off its daily high after comments by Bank of England deputy governor Ben Broadbent. Broadbent spoke about the rise in UK inflation, which could reach up to 9% due to the surge in energy prices.

Ben Broadbent’s comments

Speaking at a conference at Gresham College in London, organised by the National Institute of Economic and Social Research and The Money Macro and Finance Society, the Deputy Governor of the BoE highlighted the risks of inflation which has been exacerbated by the war in Ukraine. He said: “From an economic perspective, coming on top of what was already a very steep rise in the cost of globally traded goods, in the wake of the pandemic, the invasion has led to substantial rises in the cost of energy and other commodities. As a big net importer of manufacturers and commodities, it’s doubtful that the UK has ever experienced an external hit to real national income on this scale. From the narrow perspective of monetary policy, it will result in the near term in the difficult combination of even higher inflation but weaker domestic demand and output growth.”

His comments come after the Bank’s Governor Andrew Bailey said that the UK is facing an energy price shock last seen in the 1970s. On Wednesday, Broadbent also referred to the “unpredictable shocks hitting the economy” and that “the appropriate path of interest rates is necessarily unpredictable as well.”

Household bills could rise to £2,500 by autumn

According to the influential forecasting group, EY Item Club (EYIC), normal household energy bills could rise up to £2,500 by autumn. The increase in energy and commodity prices partly the result of the war in Ukraine, will have a serious effect on households and slowdown economic activity. EY Item Club says that rising prices will add to UK inflation which is already at very high levels and predicts that inflation could peak at a 40-year high of 8.5% in April with prices growing by 6% at the end of 2022. The group has warned that the 54% rise in home energy bills this April means that lower-income households could experience an inflation rate of around 10%.

With more energy bill increases expected in October, the EYIC says lower-income households will have to deal with steadily higher levels of inflation relative to higher-income households, that could last beyond 2023. Chief economic adviser to the EYIC, Martin Beck, said that, while the recent Spring Statement included some help for households, consumers will experience the pain of inflation and a squeeze to real incomes: “Consumer spending is a key part of the UK economy, and the expectation has been that the passing of the worst of the pandemic would spur a corresponding consumer recovery. But the war in Ukraine and rising energy prices mean that outlook has dimmed.”

It is already noticeable that “UK shoppers are choosing to shop at discount supermarkets in greater numbers as grocery price inflation reaches its highest level in a decade amid a mounting cost of living crisis.”

Food price inflation, increased by the rising cost of such commodities as wheat and cooking oil has forced shoppers to change their habits and seek ways to save on basic necessities.

The UK’s poorest families are also expected to see the amount of spare cash fall by a fifth this year with £850 less to spend on non-essential items. According to the latest figures from market analysts Kantar, prices are rising the fastest for pet food and savoury snacks but continue to fall for some products such as fresh bacon. Price rises are also increasing due to the rising cost of labour and basic commodities, driven by a combination of Brexit, rising demand after the pandemic and the war in Ukraine.

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 pound to US dollar exchange rate has consolidated (it is not going up or down) as markets are cautiously optimistic, while there is renewed demand for the US dollar. In regards to a May rate hike, BoE Governor Andrew Bailey said on Monday that the situation is very volatile after Russia's invasion of Ukraine pushed energy prices higher. However, the positive change in risk sentiment appears to have helped the pound to US dollar exchange rate early Tuesday.

Bank of England Governor Andrew Bailey’s speech

The pound dropped following Bailey's comments on the pound and economic outlook. While speaking at a virtual event on Monday, the Governor of the BoE, Andrew Bailey, noted that they need to be very cautious on the forward guidance language as there is increased uncertainty about Britain’s economic outlook with evidence of an economic slowdown in business and consumer surveys.

When he was asked about the possibility of another rate hike in May, he responded by saying "the situation is very volatile.” The risks for inflation were two-sided, he said, as it could either slow or accelerate more than the BoE has projected.

He also said that the shock to inflation-adjusted incomes in Britain due to higher energy prices will be bigger than in any year in the 1970s. He stated: “This really is an historic shock to real incomes. The shock from energy prices this year will be larger than every single year in the 1970s.” After the start of the war in Ukraine, oil and gas prices surged, pushing inflation higher and adding to the painful squeeze on family incomes in the UK.

Bailey warned that the increased volatility seen in commodity prices means that financial markets’ resilience cannot be taken for granted and central authorities are monitoring the situation. As he noted: “Liquidity conditions have deteriorated in many commodity markets, margining costs have risen, which is of course a reflection of much higher volatility and risks in these markets. We can't take resilience in particularly in that part of the market for granted. There's a strong need to work together on this.”

Bank of England and rate hikes

The Bank of England’s dovish 25bp hike in March is likely to set a more controlled tone for the pound in the coming weeks, and economists expect the BoE to deliver three more 25bp hikes this year. HSBC economists have said that “the shadow cast by the BoE meeting over the GBP will persist in the coming weeks, especially if BoE members continue their dovish refrain.” They added that “With higher energy prices, along with other inflationary factors, we now see UK CPI inflation running at close to 8% for the rest of 2022 and expect the BoE to deliver a 25bp hike in each of the next three meetings, taking the policy rate to 1.50% this year. However, this remains considerably more dovish than the market curve. As such, risks to the GBP are skewed to the downside.”

Russia-Ukraine conflict

The pound was supported by positive risk on market sentiment due to hopes that there will be progress in the Russia-Ukraine peace talks. This has limited gains for the US dollar and helped the pound. The market’s focus will remain on fresh developments surrounding the war in Ukraine and any headlines will impact on market sentiment.

 

The pound has weakened against the US dollar as the greenback rose amid higher US treasury yields and Fed-BOE policy divergence. Covid concerns and the war in Ukraine will also keep the pound lower as markets await the Bank of England Governor Andrew Bailey's speech.

The pound against the euro remains supported but struggles for momentum due to uncertainty about the BoE rate outlook.

Pound - US Dollar exchange rate

The pound to US dollar exchange rate was lower on Monday as the strength of the US dollar weighed the pair down. The dollar was boosted by rising US T-bond yields following last week’s comments from US Federal Reserve policymakers which strengthened expectations for a 50-basis points rate hike in May. According to the CME Group FedWatch Tool, markets are pricing in a possible double rate hike at the next FOMC meeting.

Bank of England speeches

Analysts have warned that speeches from BoE Governor Andrew Bailey and Deputy Governor for Monetary Policy at the Bank, Ben Broadbent, may see a decrease in BoE expectations and a fall in the pound as the Bank is expected to warn against high expectations for more rate hikes which could lead to inflation falling below the Bank’s target.

BoE's Bailey will deliver a speech titled "Macroeconomic and Financial Stability in Changing Times" and a Q&A session will follow as well. Disappointing economic releases which showed that the private sector's business activity in early March expanded at a softer pace than in February and a drop in retail sales in the same month will put more pressure on the BoE as inflation continues to rise.

The speeches from BoE Governor Andrew Bailey and Deputy Governor Ben Broadbent are scheduled for Monday and Wednesday respectively and will be closely watched by investors for any signs that will shed light on the outlook for the Bank Rate. If Bailey suggests that the Bank will adopt a cautious stance with regards to future rate hikes, then the pound could continue to weaken.

Ukraine negotiations

Financial markets will focus on the negotiations between Russia and Ukraine, which are set to recommence in Turkey on Monday and continue until Wednesday. Any progress toward a ceasefire agreement or resolution of the conflict would support the pound and vice versa.

The euro has been more sensitive to the outcome of the negotiations between Russia and Ukraine, and the pound could fall against the euro if the peace talks result in a resolution or a ceasefire agreement.

Interest rates

If the market diminishes its expectations about further tightening, then the pound will weaken. The BoE said in its March policy decision that higher energy costs will shrink the economy and reduce domestically generated inflation, potentially making them a replacement for some of the interest rate rises the Bank had previously proposed. As analysts note, some rate hikes could be delivered in the near-term, but how these are communicated will be influenced by economic data and geopolitical factors. According to February’s forecasts, the Bank Rate was expected to rise to 1.5% by early 2023. Markets will closely watch the next round of projections due out in May which will show to what degree the BoE’s outlook has been affected by the war in Ukraine, higher energy costs and inflation.

The outlook for the Bank Rate is considered to be a risk for the pound, but the divergence between BoE and ECB policy could benefit the pound to euro exchange rate. Analysts expect the pound to strengthen against the G10 currencies but fall against G10 commodity currencies.

 

The pound US dollar exchange rate lost some of its gains following the release of poor UK retail sales data on Friday morning. The UK retail sales data disappointed expectations as it came in at -0.3% MoM in February, while core retail sales for the UK fell by 0.7% MoM the same month.

The disappointing retail sales data was much lower than the expected 0.6% and the previous reading of 1.9%. The core retail sales, which came at -0.7% MoM was also much lower than the expected 0.5% and the previous reading of 1.7%. When compared to a year earlier, the UK retail sales rose by 7% in February versus the expected 7.8% and last year’s reading of 9.4%, while the core retail sales increased by 4.6% in February versus 5.6% expectations and 7.5% the year before.

Retails sales: main points

According to the Office for National Statistics (ONS), “Food store sales volumes fell by 0.2% in February 2022 with large falls in alcohol and tobacco stores, which may be linked to higher spending in pubs and restaurants as confidence increased in going out; food store sales volumes were 0.1% below pre-coronavirus February 2020 levels.”

In terms of non-food stores sales volumes, there was an increase by 0.6% in February 2022 with growth in clothing (13.2%) and department stores (1.3%), as people returned to their offices and restrictions were lifted.

Automotive fuel sales volumes rose by 3.6% in February 2022 following the end of Plan B restrictions in England at the end of January where people started to travel again, with sales volumes reaching higher pre-coronavirus levels (0.9%) for the first time.

UK consumer confidence falls

GfK’s Consumer Confidence index, which every month provides a snapshot of how UK consumers feel about the economy and their outlook for the next 12 months, has fallen by five points to -31 in March, which are very low levels last seen in October and November 2020.

The forecast for personal finances in the next 12 months fell to -18, which is 28 points lower than this time last year. Expectations for the general economic situation in the next year have also fallen to -49, which is 32 points lower than March 2021.

The Ukraine war, higher cost of living and the pandemic have pushed UK consumer confidence lower as people are more worried about their personal finances. With surging inflation at a 30-year high, and expected to reach 8% in April, people are pessimistic about their financial situation and the more general geopolitical climate due to the war in Ukraine.

Joe Staton, client strategy director at GfK, has warned that there is “more bad news to come.” He said: “A wall of worry is confronting consumers this month and there is an unmistakable sense of crisis in our numbers. Consumers across the UK are experiencing the impact of soaring living costs with 30-year-high levels of inflation, record-high fuel and food prices, a recent interest-rate hike and the prospect of more increases to come, and higher taxation too – all against a background of stagnant pay rises that cannot compensate for the financial duress. This is the fourth month in a row that UK consumer confidence has dropped.”

He also stated that “Confidence in our personal financial situation and in the wider economy are severely depressed while the daily news of unimaginable suffering from a horrifying war in Europe and rising COVID numbers at home is adding to the bleak mood. The outlook for consumer confidence is not good; it’s certain there’s more bad news to come.”

Chancellor Rishi Sunak’ spring statement on Wednesday has also added to the gloomy outlook as households facing the hardest squeeze in the cost of living will get little help, while the Resolution Foundation has warned that 1.3 million people will fall into absolute poverty in 2023.

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The pound is extremely sensitive to global market sentiment and concerns over a slowdown in UK economic growth in the coming months. Investors fear that this will also influence the Bank of England’s monetary policy decisions and could diminish expectations for future interest rate hikes.

The pound fell as higher oil prices resulted in a stock market selloff. Chancellor Rishi Sunak’s Spring Statement also contributed to the pound’s weakness as it offered a disappointing assessment of the UK economic outlook. The Chancellor said that “The actions we have taken to sanction Putin’s regime are not cost-free for us at home. The invasion of Ukraine presents a risk to our recovery as it does to countries around the world.” After the Spring Statement announcement, the chancellor has been criticised for failing to help those who are out of work and on lower incomes.

1.3 million could fall into poverty

The Chancellor’s Spring Statement on Wednesday has attempted to alleviate some of the pain from rising prices by providing some tax cuts, including a 5p-a-litre off fuel duty and a £3,000 increase in the limit for national insurance payments. However, it was criticised for failing to support poorer families and vulnerable groups from the rising cost of living. According to new analysis of Wednesday’s Spring Statement by the Resolution Foundation, around 1.3 million people will fall into absolute poverty in the next year. Typical working-age household incomes will drop by 4 per cent in real-terms next year (2022-23), a loss of £1,100. The poorest quarter of households could see their incomes drop by 6 per cent.

The Institute for Fiscal Studies noted that the Spring Statement omitted "anything for those subsisting on means-tested benefits", who will be dealing with the cost of living increases of about 10% "but their benefits will rise by just 3.1%." Paul Johnson, the Director of the institute told a news conference: "His choice to increase national insurance rates and reduce the basic rate of income tax looks, to me at least, indefensible from an economic point of view - though one can see the political attractions."

Ukraine

The pound has been very sensitive to news regarding the war in Ukraine but hopes for a ceasefire have helped markets recover. Investors have also come to terms with the situation and do not expect a further escalation.

The pound is forecast to continue to strengthen as the situation in Ukraine improves, but any unpredictable turn of events could create currency volatility.  

Energy prices and the currency market

Oil prices have been surging and this creates more risks to global economic growth and increases volatility. Currencies such as the pound and euro, for example, that belong to countries that are net importers of energy have been especially sensitive when energy prices rose. On the other hand, currencies such as the Australian, New Zealand and Canadian dollars which belong to countries that are energy and commodity exporters have strengthened. Safe-haven currencies like the Swiss franc and US dollar have also strengthened.

According to Barclays’ research, the UK is the most energy sufficient currency out of the G10 currencies as it produces 71% of its primary energy consumption needs, with over 80% of the UK’s natural gas imports coming from Norway, and only 15% from Russia. While it is affected by the surge in energy prices, it is not as much affected as other European countries. The OBR said that “higher global energy prices will weigh heavily on a UK economy that has only just recovered its pre-pandemic level.”

Rishi Sunak has pointed out that the Government could intervene on energy bills before the autumn if bills rise sharply again in October. He told BBC Radio 4’s Today programme: “Yes, of course we’ll have to see where we are by the autumn and it’s right for people to recognise that they are protected between now and the autumn because of the price cap.” He added: “I always keep everything under review, and the Government, as it’s shown over the past two years, is always responsive to what’s happening. But I would say with energy prices, you know, they are very volatile, and I don’t think you, I or anyone else has any certainty about what will happen in October right now.”

BoE and interest rates

The ongoing rise in inflation could push the BoE to raise interest rates further, however, the Bank could also exercise some caution as higher rates could slow down economic growth. The currency market is currently pricing in up to 130 points of rate hikes in 2022, but some analysts say the Bank will fail to meet market expectations.

If rate expectations continue, then the pound will remain supported but if any such expectations are cut then the pound will fall. Some analysts have noted that the pound could go lower against the euro if the market raises its bets that the European Central Bank (ECB) will tighten policy at the end of 2022.

 

Higher-than-expected inflation has helped the pound rise against the US dollar, as markets expect the Bank of England to proceed with further interest rate hikes.

According to the Office for National Statistics, UK CPI inflation rose 6.2% year-on-year in February, more than the 5.9% increase markets were expecting and higher than the 5.5% reported in January. Core inflation rose 5.2% in February, more than January's 4.4% figure. As a result, prices for goods rose, including those for food and games.

UK inflation

UK inflation has surged to a new 30-year high as higher energy, fuel bills and food prices drove the worst cost of living squeeze in decades. That’s the highest inflation reading since March 1992, at a time when household budgets are coming under extreme pressure. Last week, the Bank of England predicted inflation could reach 8% in April and could even go as high as 10% in the autumn when the energy price cap rises again.

The news comes hours before Rishi Sunak presents his mini-budget, as he prepares a fresh package of measures to alleviate inflationary pressures on consumers. He is expected to promise “a faster-growing economy, the security of more resilient public finances, and security for working families as we help with the cost of living.”

Sunak has a difficult task, as with inflation so high, taxes rising next month, and benefits such as pensions rising by 3.1 per cent, household incomes will experience a sharp fall.

Jack Leslie, senior economist at the Resolution Foundation has said that the Chancellor will need to set out a bold response to the situation as “Another sharp rise in inflation last month offers a foretaste of the huge income squeeze coming this year, with inflation likely to hit at least 8 per cent this spring – which could be the highest it’s been in 40 years – along with a second spike this autumn.” Leslie noted that prolonged high inflation “is a complete disaster for living standards. It will mean pay packets continuing to shrink, along with vital income support such as Universal Credit and the State Pension. The Chancellor will need to set out a bold response to this cost of living crisis in his Spring Statement today, starting with ensuring that benefits keep pace with inflation over the coming 12 months, rather than shrink by £10 billion as they are currently on course to do.”

Bank of England rate hikes

Markets have raised their expectations this week for the number of Bank of England rate hikes that are likely to be delivered in 2022, pushing the value of the pound higher. If this continues, then the pound will go higher.

Economists are concerned that inflationary pressures will continue to persist and increase, adding more pressure to the Bank to act.

Pantheon Macroeconomics has reported that higher inflation will stall UK economic recovery as households’ spending power shrinks. Chief U.K. Economist at Pantheon Macroeconomics Samuel Tombs expects the BoE to stop raising interest rates once the Bank Rate is 1.00% in May as further rate hikes will increase the risk of economic recession. The market has priced in up to 138 points of rate hikes for 2022 which means there is room for disappointment if the Bank pauses hiking rates which could also push the pound lower.

 

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 pound has recovered against the euro and US dollar, but some analysts expect it to remain within the same range and not rise or fall remarkably. Markets seem to be a bit more optimistic and expect further Bank of England interest rate hikes. The war in Ukraine continues with little progress being made, and markets are starting to digest the implications of Russia’s aggression in Ukraine.

The pound was one of the worst-performing currencies since the war in Ukraine started and traders have adjusted to this. While some analysts believe the pound will be supported in the near-term, however, if the situation in Ukraine deteriorates, then it could drop.

Uncertainty continues for the pound

  • Ukraine conflict

Market risk appetite has returned modestly, and the pound will continue to benefit as sentiment improves. While the war in Ukraine continues, there is hope that a deal could be reached, as talks between the two sides continue. However, Dmitry Peskov, the Russian Presidential spokesman, said on Monday that the two sides were still far apart. There were also hopes that the two presidents, Ukrainian President Volodymyr Zelensky and Russian President Vladimir Putin would sit and resolve issues, but this looks to be highly unlikely, at the moment.

Analysts have noted that, after the Covid-19 pandemic and Brexit, the Russia-Ukraine conflict is another considerable risk and could stall any upside potential for the pound. The crisis has worsened the outlook for risk currencies such as the pound, with the euro being more vulnerable.

  • Bank of England interest rate hikes

Expectations for further Bank of England interest rate hikes has been a key driver for the pound and continues to lend support to the British currency. The Bank hiked 25 basis points last Thursday, as expected, but the cautious tone of the Bank about the number of rate hikes disappointed markets and pushed the pound lower.

The Bank has warned the market not to expect as many as 120 basis points of rate hikes which were priced in by the market for the rest of the year, as inflationary pressures could impact on economic growth. Some economists feel that it will be much more difficult for Sterling to strengthen following the BoE’s increased focus on inflationary risks to growth.

The pound has recovered recently, however, and the Bank of England remains much more hawkish than other banks, with at least two interest rates expected by most analysts.

Tuesday’s report: UK government borrowing higher than expected

UK government borrowing rose more than expected in February, as higher inflation pushed debt interest payments higher. This is disappointing news for Rishi Sunak the day before he presents his spring statement in the Commons.

The Office for National Statistics said the government’s budget deficit was £13.1bn in February, the second-highest borrowing figure for February since records began in 1993. Higher inflation pushed up interest payments on government debt by more than 50%. The chancellor responded to the higher-than-expected government borrowing by saying:

“The ongoing uncertainty caused by global shocks means it’s more important than ever to take a responsible approach to the public finances. With inflation and interest rates still on the rise, it’s crucial that we don’t allow debt to spiral and burden future generations with further debt. Look at our record, we have supported people - and our fiscal rules mean we have helped households while also investing in the economy for the longer term.”

Economists expect the chancellor to be cautious tomorrow. Samuel Tombs, chief UK economist at Pantheon Macroeconomics said that Rishi Sunak could “announce a limited package of measures, amounting to a net giveaway in 2022/23 of about £13bn, or 0.5% of GDP. That probably would mean that households still will experience this year the biggest annual decline in their real disposable income since the Second World War.”

Wednesday: What to watch

The UK’s CPI numbers on Wednesday are key as the Bank of England (BOE) has raised interest rates by 25 basis points last week. The UK inflation numbers on Wednesday will influence any potential  monetary policy decision the BOE will have to make in its next policy announcement.

The monthly and yearly Producer Prices Index (PPI) Core Output on Wednesday will also be watched, with a preliminary estimate for the monthly PPI Core Output at 0.9%, and an estimate for the yearly PPI Core Output at 10%, higher than the previous 9.3%.

 

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 pound is under pressure as market mood has weakened following renewed concerns over Russia's invasion of Ukraine. The divergence between the Fed and Bank of England (BoE) policy has also hurt the pound and could continue weighing on the British currency.

The BoE hiked interest rates by 25 bps but showed caution regarding further tightening, dampening the pound outlook. Analysts expect the pound to US dollar exchange rate to remain under pressure if it continues trading at a lower level. The pound to euro exchange rate could also struggle to recover this week following the BoE’s cautious tone last Thursday.  

What to watch out this week

  • Andrew Bailey’s remarks

The key event of the week ahead for the pound will be Governor Andrew Bailey’s participation in a panel discussion this Wednesday titled Emerging Challenges for Central Bank Governors in a Digital World, at the Bank for International Settlements Innovation Summit.

  • Inflation figures

On Wednesday, inflation figures for February will also be closely watched as investors would like to see how soon the Bank could raise interest rates again.

Analysts expect the Monetary Policy Committee (MPC) of the BoE to be less optimistic and more passive in the second half of the year, which could drive the pound lower. It is now expected that the pound will be under pressure especially if inflation is higher than expected, and at a time when the BoE is concerned with the risks to growth.

  • Mini budget

Apart from February’s inflation figures and comments from Andrew Bailey, on Wednesday we also get HM Treasury’s announcement of its latest budget update, which will also be analysed by market participants. Chancellor Rishi Sunak is under pressure to announce further financial measures to support households who are suffering from the worst cost of living crisis for at least 20 years.

While the UK was getting ready for the biggest squeeze on living standards, the war in Ukraine has deepened the crisis. The surge in the price of oil has pushed petrol and diesel prices higher. Economists warn that further pressure on food and energy prices could push inflation even higher. With domestic energy prices and taxes already rising in April and continued volatility in commodity markets, the Chancellor of the Exchequer is facing even more pressure to alleviate the pain when he reveals the springtime mini-budget on Wednesday.

Now, the problem is not only the poorest households, as due to higher and persistent inflation families who needn’t worry about the cost of living are now also facing difficulties. The chancellor is expected to extend his earlier £9bn package of support for energy bills, which has been reduced by higher inflation. However, speaking to the Conservative conference in Blackpool, he avoided clarifying how he might help households with bills and admitted that global inflationary pressures and higher prices were out of his control. The chancellor said he had “enormous sympathy for what people are going through”, but “I can’t solve every problem. No government can solve every problem, particularly when you’re grappling with global inflationary forces. They are somewhat out of my control.”

Markets will await to see how Sunak will make a difference in his statement on Wednesday, whose popularity rankings have grown during the pandemic following a huge economic support package. As he said on Sunday, “I will stand by [the people] in the same way that I have done over the past couple of years. Where we can make a difference, of course we will.”

The pound has weakened after the Bank of England’s cautious guidance that markets are expecting more interest rate hikes than the Bank thinks are necessary. The UK currency fell against all its major peers in response to the divergence between what the market is expecting and what the Bank will deliver. The Bank's Monetary Policy Committee (MPC) on Thursday voted 8-1 to hike rates by 25 basis points.

While the Bank admitted that further hikes could be necessary, it noted that the market's expectation for the Bank Rate to be at 2.0% by the end of the year was too extreme. The news has disappointed markets as the Bank’s tone was not as hawkish and optimistic as expected. The market was pricing in a further 134 basis points of hikes for 2022 but after Thursday’s policy update, this has been reduced to 123 points.

BoE concerns

The Bank is now clearly concerned that the war in Ukraine will push inflation higher and will affect consumers and businesses, slowing down economic growth. With higher energy, food and commodity prices having increased due to the war in Ukraine, inflations will skyrocket to around 8% in April according to the Bank's forecasts.

The Bank worries that inflation will hurt demand as it expects it to fall faster than initially forecast over the medium-term. Hiking interest rates over-aggressively will help very little when inflation falls back. This is why the Bank has reduced some of its rate hike expectations. The Bank’s more dovish and cautious tone has weakened the pound, as markets are slowly digesting the news.

The foreign exchange market has diminished its expectations for 50bps hikes to be delivered at upcoming policy meetings and expects four more 25bps hikes at successive meetings up until September with another rate hike in 2023. The need for a more modest approach in the coming months is something that the Bank now considers to be more appropriate.

According to analysts, the Bank is in a difficult position as it is raising rates to tame inflation due to supply chain issues while at the same time the cost-of-living squeeze is affecting households.

The war in Ukraine will continue to hurt the pound and a possible de-escalation will offer support to the British currency.

ECB and the euro

The pound is expected to remain supported as analysts say, since the BoE will continue its interest rate hikes, but in the long term, the euro could benefit from expectations that the European Central Bank (ECB) will start changing its monetary policy and raise interest rates soon. According to Reuters, the President of European Central Bank, Christine Lagarde, said on Thursday during a news conference that the ECB has no intention of raising interest rates until some time after it has ended its bond buying programme at the end of the third quarter. Lagarde said: "Any adjustment to the key ECB interest rates will take place some time after the end of our net purchases under the APP (Asset Purchase Programme) and will be gradual.” Markets are now pricing in around 43bps worth of interest rate hikes this year. Investors have scaled back their expectations on rate hikes since the war in Ukraine broke out. The ECB president had discussed raising interest rates at a news conference on the 2nd of February despite insisting in the past that such a move was "very unlikely" in 2022.