The pound has managed to recover on Thursday, as the US dollar failed to retain its strength. However, analysts have warned that the pound’s gains will be limited.

The Bank of England Governor Andrew Bailey was cautious yesterday when he spoke at the ECB Forum in Portugal. He said that it was clear that the economy is slowing, and the BoE would take a more gradual approach toward hiking interest rates. Recession fears and Brexit tensions could keep the pound lower.

In terms of economic releases, on Thursday, the final UK GDP report met expectation and previous estimates as the economy expanded by 0.8% during the first quarter of 2022. The UK Office for National Statistics also reported that the current account deficit reached £51.7 billion or 8.3% of the gross domestic product in the first three months of the current year.

GDP growth

The Office for National Statistics (ONS) has confirmed that the UK economy grew by 0.8% in January-March (first quarter), as first estimated. The annual figures showed that the UK GDP rose by 8.7% in Q1, which was the same as the previous reading and as expected. The GBP/USD currency pair was up on the day, holding on its gains.

Darren Morgan, director of economic statistics at the ONS, said: “Our latest estimate for economic growth in the first quarter is unrevised as a whole, showing the UK continued to recover from the pandemic. Both household incomes and spending rose in cash terms in the first quarter, leaving the rate of saving unchanged. However, once taking account of inflation, incomes fell again, for the fourth consecutive quarter.”

According to the latest GDP data from the ONS, UK household incomes suffered another fall in the first three months of this year, as the cost-of-living crisis worsened. Inflation outperformed earnings in January-March, for the fourth quarter in a row. UK households experienced the longest drop in real income on record. Real Household Disposable Income fell by 0.2% in the January-March quarter. The latest drop in UK household real incomes leaves people less protected as the risk of recession looms ahead.

Paul Dales of Capital Economics explained that the final Q1 GDP data could leave households “a bit more vulnerable to the big fall in real incomes that’s going to hit in Q2 and Q3.” While consumer spending and GDP won’t fall as much as real incomes, the economy will remain weak and recession will pose a real risk, he said.

Inflation to persist

Inflation is expected to surge and reach higher levels than other major economies, the governor of the Bank of England has warned. Speaking at a conference of central bankers in Portugal, Andrew Bailey said inflation was higher in the UK and would persist for longer than previously expected as increasing petrol and gas prices have pushed household bills higher.

Bailey said he was determined to increase interest rates aggressively to control inflationary pressures.  He explained: “I think the UK economy is probably weakening rather earlier and somewhat more than others. There will be circumstances in which we will have to do more. We’re not there yet in terms of the next meeting. We’re still a month away, but that’s on the table. But you shouldn’t assume it’s the only thing on the table – that’s the key point.”

While economic growth has slowed down, Bailey said that there was a possibility of raising rates by 50 basis points at the Bank’s next meeting in August.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The pound has weakened and lost previous gains as the US dollar strengthened. Investors remain cautious following recession and Brexit concerns. Fed Chairman Jerome Powell and Governor of the Bank of England Andrew Bailey are expected to speak at the Policy Panel at the ECB Forum on Wednesday. With inflation persisting and remaining high, Governor Bailey would possibly avoid pushing back too much against tightening expectations.

Sterling has not been affected by news of another potential Scottish referendum (19 October 2023), as the possibility of Westminster allowing it is unlikely, but remains to be seen over the coming months.  

Fed and BoE commentary

Markets have high expectations of Federal Reserve chair Jerome Powell delivering a hawkish commentary on interest rates in his speech on Wednesday.

The speech from Bank of England Governor Andrew Bailey will also be in focus. Bailey may discuss how to create price stability in the UK economy. Markets expect a hawkish commentary.

In other news, the Financial Times (FT) reported on Tuesday that the UK is ready to cut off gas supplies to mainland Europe in case its economy faces shortages under an emergency plan. This may create lower oil stockpiles in the Eurozone and could have a negative effect on Brexit.

Recession worries weigh on markets

Recession worries are weighing on markets today, after inflation hit consumer confidence in America. Wall Street fell yesterday, while the S&P 500 lost 2%, and Nasdaq 3%.

The current business conditions are deteriorating each month, while consumers are expecting things to get worse. This pessimistic view highlights the damage that has been done by inflation.

European markets were also lower on Wednesday, with the FTSE 100 down around 55 points, while Germany’s DAX was down 1.1%. Investors are unable to avoid feeling worried about a global slowdown. As Richard Hunter, head of markets at interactive investor said, “With the consumer being central to US economic growth, the recent raft of pessimistic readings has led to some concerns that sentiment could become self-fulfilling as consumers hunker down in the face of higher prices, especially fuel and food. The Federal Reserve will of course be aware of the deteriorating sentiment, but for the moment is showing no signs of abandoning its primary objective of battling inflation head-on.”

Pound concerns

The market sentiment remains weak as there are fears that central banks’ more aggressive attitude to raise interest rates sharply to control inflation would hurt global economic growth. This belief has helped to strengthen the US dollar and pushed the pound lower. The pound was further weighed down by Brexit concerns and expectations that the Bank of England would follow a more gradual approach towards raising interest rates.

On Monday, the UK House of Commons voted in favour of a divisive bill that would unilaterally change part of Britain's Brexit deal agreed in 2020. The move raises the risk of new tensions with the EU as the cost-of-living crisis in the UK and recession fears grow. This will continue to undermine Sterling.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The EUR/GBP pair is a popular pair and belongs to the minor forex pairs group. It is a cross currency pair as it involves two currencies which are valued against a third currency, the US dollar. The EUR/GBP shows how many pounds are needed to buy one euro.

Cross currency pair

When a cross-currency pair is exchanged, two transactions take place. The first one involves trading one currency for its equivalent in US dollars, and the second involves the exchange of US dollars to another currency.

EUR/GBP: limited volatility

The euro-pound cross tends to have very limited volatility on a daily basis, and usually fluctuates when very important events happen in either of the two economies, such as Bank of England or European Central Bank announcements on monetary policy, or political tensions such as the recent conflict in Ukraine.

Key institutions

  • The European Central Bank (ECB)

The European Central Bank (ECB) is the central bank that determines the monetary policy for the Eurozone and ensures price stability, so that the euro’s purchasing power is not affected by inflation. The ECB’s main goal is to keep year-on-year consumer prices from rising too much and has an inflation target of around 2% in the medium term. The central bank is also responsible for the money supply. The European Central Bank operates through the Executive Board, the Governing Council and the General Council. Christine Lagarde is the ECB President since November 2019. She had served as Chairman and Managing Director of the International Monetary Fund between 2011-2019. Her comments as ECB President are very important as they can influence the market and the euro in the near term. If the bank has a hawkish outlook or Lagarde’s comments strike a determined tone to act then this is seen as positive/bullish for the EUR, while a dovish tone is seen as negative/bearish.

  • The Bank of England

The Bank of England is the central bank of the United Kingdom. The BoE is focused on maintaining monetary and financial stability in Britain, but also producing secure banknotes, operating an asset purchase facility and keeping inflation within the target. The bank is accountable to Parliament and the public. Andrew Bailey has been Governor of the Bank of England since March 2020. Prior to becoming the Governor, he worked at the Bank as Executive Director for Banking Services and Chief Cashier, as well as Head of the Bank's Special Resolution Unit. He also had the position of the  Governor's Private Secretary, and acted as the Head of the International Economic Analysis Division in Monetary Analysis.

When does the euro tend to rise?

According to analysts, the euro tends to strengthen when the ECB is optimistic, ECB members sound more hawkish and rates are expected to increase. If the ECB is more optimistic and ready to act than other banks, especially the Fed, then this is also supportive of the euro. When the economy in Europe shows positive signs that is growing and when Lagarde refers to less risks or sounds positive, the euro also rises.

When does the euro tend to weaken?

Any talk about rates falling, drives the euro lower. Similarly, any gloomy news or disappointing tone from the ECB, signs of recession in the Eurozone, or political uncertainty such as Macron losing a majority are also influential and tend to weaken the single currency. The ongoing war between Russia and Ukraine is also another negative for the euro. The euro tends to weaken as inflation rises and growth slows down.

When does the pound tend to strengthen?

When the economic outlook for the UK appears optimistic and rosy then the pound strengthens. Analysts have noted that the emergence of a more stable Conservative PM could also provide support to Sterling. As with other central banks, an optimistic and hawkish Bank of England tends to drive the pound higher. Additionally, the BoE’s intention to push rates higher is usually supportive of the pound.

When does the pound tend to weaken?

Rising energy and food prices and the BoE’s reluctance to act and tackle inflation usually push the pound lower. Additionally, projections for a possible recession and a weak, gloomy outlook also tend to weaken the pound. A slowdown in growth and a slower rate hike cycle can also push the pound lower. The rising cost of living crisis and further risks to the economy are negative for the pound.

With the current volatility and weak market sentiment, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

 

The pound to US dollar currency pair rose early on Monday and reached a one-week high, but later lost its traction. Analysts have warned that gains will be limited due to dovish BoE expectations, Brexit concerns and recession fears.

Brexit and Northern Ireland protocol

The gains for the pound will be limited as markets remain cautious over concerns regarding the post-Brexit trade agreement. UK MPs will vote later on Monday on legislation that would allow them to make unilateral changes to the post-Brexit deal and remove checks on goods entering Northern Ireland from the rest of the UK. The European Union has expressed its disagreement with such a move and said that it would violate international law. British Prime Minister Boris Johnson said on Monday that he intends to turn the legislation, if approved, into law by the end of the year. He has also said that the plan will restore the balance of the Belfast/Good Friday agreement, despite that some Conservative backbenchers are concerned it breaches the rule of law.

Post-Brexit trade deal and recession concerns

The UK government’s attempt to remove parts of the Northern Ireland protocol could add to inflationary pressures that could push the UK into recession. According to academics at the University of Liverpool Management School, the Northern Ireland Protocol Bill will trigger economic policy uncertainty. An article published in the LSE’s Business Review, by professor Costas Milas and lecturers Michael Ellington and Marcin Michalski, argues that rising economic policy uncertainty and higher interest rates will weigh on the economy. They wrote: “Our belief is that by pushing forward with this very bill, Johnson’s government will unnecessarily add to existing economic policy uncertainty. Indeed, how many counties around the world will be willing to sign trade agreements with the UK when Johnson’s government has been accused of breaching international law? This will fuel economic policy uncertainty but also hit the country’s trustworthiness in international markets therefore increasing the interest rate that investors demand to bring, or even keep, their money in the UK.” They added that economic policy uncertainty and higher interest rates will push the country into a recession.”

Recession fears

Rising recession fears and geopolitical tensions are threatening to push the UK economy into recession. According to KPMG’s latest UK Economic Outlook report, released on Monday morning, the cost-of-living crisis could push the economy into “a mild recession” in 2023. The Ukraine war and China lockdowns have added further pressure on supply chains and pushed commodity prices higher.  

KPMG has noted that UK GDP growth will fall to 3.2%, before slowing further to 0.7% in 2023. They said that policy actions to fight inflation and any further issues resulting from geopolitical tensions could bring about another recession. They mentioned aggressive monetary tightening by the US Fed, interruptions of gas supplies from Russia, and additional shock to global wholesale gas and oil prices. In the UK, a potential recession will be the result of a further squeeze on UK households and a sharper decline in household consumption.

A growing number of economists anticipate that America could fall into recession next year, while Europe’s economy has shown signs of a slowdown too. With UK inflation at 40-year highs, consumer confidence has hit record lows, as people are struggling with their finances and have cut spending.

Disappointing UK macroeconomic data, concerns about the UK economy slowing down and diminished expectations of further rate hikes as the Bank of England chooses a more gradual approach towards raising interest rates have acted as headwinds for the pound. The current tensions between the UK and EU about the Northern Ireland protocol have also weighed on the pound to US dollar currency pair.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The pound fell on Friday against the US dollar following disappointing UK Consumer Confidence data for June and Retail Sales data for May. UK consumer confidence has fallen to its lowest level since records began 50 years ago, as the cost-of-living crisis has hit households. UK Retail Sales fell more-than-expected on YoY but rose on MoM.

On the political front, Conservatives’ Chairman Oliver Dowden resigned after a defeat in UK by-elections. The release of disappointing UK Retail Sales have raised concerns about the economic outlook, while the Conservative party’s defeat has also put more weight on the pound.

Later today, Bank of England Chief Economist and Executive Director Huw Pill’s comments will be closely watched and could provide further direction to the pound.

Consumer confidence falls

Research company GfK’s monthly survey of Consumer Confidence Index dropped one point to -41 in June, hitting a new record low this month. People’s personal financial expectations fell sharply as inflation pinched their incomes. Measures of changes in personal finances and general economic situation over the last year and the next year all dropped. Joe Staton, Client Strategy Director at GfK explained that people were responding to the new economic situation in Britain and “history shows that consumers will not hesitate to retrench and tighten their purse strings when the going gets tough.” He said: “With prices rising faster than wages, and the prospect of strikes and spiralling inflation causing a summer of discontent, many will be surprised that the index has not dropped further. The consumer mood is currently darker than in the early stages of the Covid pandemic, the result of the 2016 Brexit referendum, and even the shock of the 2008 global financial crisis, and now there’s talk of a looming recession.”

Retail sales fall in May

More disappointing news also weighed on the pound. Retail sales fell in May due to the rising cost of living which led consumers to cut back on food shopping. Retail sales volumes fell by 0.5% in May from April, according to figures released from the Office for National Statistics (ONS).

The fall in sales volumes was driven by reduced spending in food stores which fell by 1.6% month-on-month.

UK Retail Sales improved from -0.7% that was expected to -0.5% MoM, but the fall in the yearly numbers from -5.7% in previous readings to -4.7% has pushed the pound lower.

On Thursday, the release of the UK S&P Global PMIs also triggered concerns about the UK’s economic growth.

Conservative defeat

The Conservatives lost 2 safe seats on Friday, dealing a harsh blow to the party and adding more pressure on the British currency. The double defeat exposed the party’s weaknesses and could renew talk of another no-confidence vote against the prime minister. The Liberal Democrats party won the Tiverton and Honiton seats while the Labour party won in Wakefield. The Conservative Party Chairman Oliver Dowden resigned after the disappointing results. The double defeat after the by-elections on Thursday is another hit to the Prime Minister who survived a no-confidence vote in his party earlier this month. While the defeat could revive talk of another no-confidence vote, Johnson should be safe until next June.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The pound has weakened on Thursday as recession fears hit markets, while Brexit concerns, UK politics, and BoE’s unwillingness to hike interest rates aggressively have also weighed on the pound. Analysts have noted that the UK by-election results and Fed Chairman Jerome Powell’s testimony later on Thursday will be crucial.

At the time of writing, we got the release of UK preliminary PMI for June. The UK Manufacturing PMI dropped to 53.4 in June, but Services PMI came better than expected at 53.4, offering support to the GBP/USD currency pair.

Recession fears weigh on markets

A recession would weigh on Britain’s public finances, affecting tax revenues and increasing welfare spending. The worries about an economic slowdown have also pushed stocks down with the FTSE 100 index losing 70 points, going down to 7018 points, close to last week’s three-month low. The German DAX has lost 0.5%, while the French CAC was 0.6% lower and Italy’s FTSE MIB was down 1%.

Economists and investors are worried that Central Banks’ fight against inflation with interest rate increases could push economies into recessions. Yesterday, the US central bank chief Jerome Powell said the Federal Reserve was determined to bring prices under control, even if it risked an economic downturn.

Following Jerome Powell’s testimony yesterday, Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said that it was unsurprising that market optimism would be hurt as Powell warned that a recession was possible and that there was the risk of the Federal Reserve failing to restore price stability and allowing inflation to become entrenched in the economy.

Boris Johnson and UK by-elections

The pound has also been weighed down by growing pessimism around UK PM Boris Johnson’s Conservative leadership. On Thursday, we have two by-elections happening in Wakefield, West Yorkshire, and Tiverton and Honiton in Devon. The Financial Times reported that, “The Conservatives are braced to lose two parliamentary by-elections, according to senior party strategists, in moves that could prompt a renewed backlash against Boris Johnson.”

The two by elections will highlight the challenges faced by the Liberal Democrats and the Conservatives. The Liberal Democrats could challenge the Conservatives’ seats in the South of England, as well as in the rural constituency of Tiverton and Honiton where the Conservative party won a huge majority in the past. Both seats are very similar demographically and politically and there are high hopes that the Liberal Democrats could prove to be victorious.  

Additionally, markets are concerned with Brexit impacting on the British workers and fishers which could also keep the pound down.

Bank of England and interest rate hikes

In the meantime, the Bank of England’s reluctance to proceed with higher interest rate hikes will add further weight on Sterling. On Wednesday, the UK Consumer Price Index (CPI) reached to 9.1% YoY, which was lower than expected by markets. On Thursday, the UK S&P Global/CIPS Manufacturing PMI fell to 53.4 from 54.6 while the Services PMI came as previously at 53.4, and higher than the 53 that was expected.

Investor pessimism

According to analysts at NatWest Markets, peak investor pessimism towards the pound has been reached, which means there will be limited downside for the UK currency against both the euro and the US dollar. They said that the pound's prospects will depend on whether the market has priced in a slowdown in the economy and that UK growth expectations will continue to be one of the main drivers of the pound’s performance.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The pound fell after the release of UK inflation data by the Office for National Statistics (ONS). UK inflation rose to 9.1% in May from 9% in April making it the highest since March 1982. The ONS said rising prices for food and non-alcoholic drinks pushed up the inflation rate.

UK inflation hits 40-year high

With the prices of food, diesel and petrol rising significantly, UK inflation has reached to 9.1%, which is the highest rate in 40 years. According to the ONS, inflation which is measured by the consumer price index CPI) was the highest since 1982 and will add more pressure on struggling households. Prices for food and non-alcoholic drinks increased at the fastest annual rate since 2009. Bread, cereal, and meat were also more expensive. Prices of petrol and diesel were at record highs with motor fuels rising by nearly a third over the past year, which is considered to be the biggest annual increase since 1989.

Core inflation, which measures the cost of living without food, fuel, alcoholic drinks and tobacco, fell back last month, from 6.2% to 5.9%.

Inflation is expected to continue to rise and the Bank of England anticipates inflation to reach 11% later this year as gas and electricity prices rise.

Bank of England and rate hikes

Sterling fell as the markets expected higher inflation and are worried that the BoE might not hike interest rates as much if inflation is lower than expected. A higher inflation rate would have solidified expectations for a 50-basis points rate hike at the BoE in August.

Paul Dales, Chief UK Economist at Capital Economics said that the numbers won’t stop the Bank of England from raising interest rates further. However, it might lead the BoE to choose a 25-bps rate hike rather than a bigger 50-bps hike.

Melanie Baker, senior economist at Royal London Asset Management noted that there will be more rate hikes for the year: “It is unlikely that we’ve seen the last rate rise this year. By raising interest rates, the Bank can cool demand to bring it down in line with supply. By acting and sounding serious about tackling high inflation, they can help lower inflation expectations. However, the Bank still aren’t sending as strong a message as they could with the last set of minutes sending an ambiguous message on their interest rate outlook.” She explained that higher inflation will continue to run faster than pay growth and this will have a negative impact on the financial situation of many households. With higher prices for food and energy, and further rate hikes by the BoE, consumers will struggle. Later, on Friday, Baker anticipates that the release of consumer confidence and May retail sales data will be disappointing.

The two main contributors to inflation, food and energy, are especially significant as the poorer consumers spend more of their income on food and fuel and they are already being affected by the rising costs.

Dales at Capital Economics stated that the release does not offer substantial evidence for "more persistent inflationary pressures” that would push the Bank to act and that it is not enough to “seal the deal on a 50bps rate hike in August.” According to Capital Economics, the Bank will raise rates from 1.25% that is currently to 3.00% next year, which is much higher than the 2% expected by the majority of analysts.  

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

 

The pound has held on to its gains against the US dollar and could continue to recover in the coming days if upcoming UK economic data is positive. Bank of England expectations have also added support. Any remarks from Federal Reserve and Bank of England policymakers will also provide direction. On Monday, BoE speakers Jonathan Haskel and Catherine Mann could also influence.

Global markets

Fears of a possible global recession have weighed over the global stock markets on Monday, as economic data disappointed, and inflation continued to climb. Last week, stock markets dropped to their lowest in two years, as investors worried that global central banks’ intention to hike faster and further interest rates to curb inflation could push economies into recession. Joe Biden’s treasury secretary Janet Yellen said that she anticipates “the economy to slow” and said that a recession was not “at all inevitable.” Speaking to ABC’s This Week host George Stephanopoulous Yellen explained that the economy has “been growing at a very rapid rate, as the labour market has recovered, and we have reached full employment. It’s natural now that we expect a transition to steady and stable growth, but I don’t think a recession is at all inevitable.”

Bank of England interest rate hikes

In the meantime, market expectations of UK interest rate hikes could be too high. As Deutsche Bank economists have noted: “The continued rise in inflation rates in connection with already slowing economic growth is generating headwinds for the GBP and concerns for the Bank of England.”

Economists at ING have also noted similar risks to the pound. As they said: “Supported Bank of England rate expectations have provided a floor for now. We continue to see some risks that we’ll see some dovish re-pricing of those rate expectations, but for now, that may only come from some explicit pushback by any of the BoE speakers scheduled this week (we’ll hear from Jonathan Haskel and Catherine Mann today). That’s because on the data side we could see yet another modest acceleration in headline inflation, while the core rate may stay above 6.0%.”

While the Bank of England and economists might disagree with the market's increasingly “hawkish” expectations for more UK interest rates, such expectations, however, have provided a considerable increase to the pound to US dollar exchange rate.

Analysts have warned that the pound could fall against the US dollar if market concerns about a global recession are exacerbated by possible remarks this Wednesday and Thursday from Fed Chairman Jerome Powell, or other Federal Open Market Committee members. 

The Fed and other central banks are striving to curb inflation and have side-lined other concerns such as the condition of the labour market and employment.

When Powell speaks this week at his semi-annual testimony to Congress, analysts anticipate that he will underline the importance of the Fed’s goal to control inflation and the need for restrictive policy settings.

In the UK, inflation data out on Wednesday and other macroeconomic data including Thursday’s S&P Global Flash PMI surveys of the services and manufacturing sectors and Friday’s retail sales report for May will be the key drivers for the pound.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

 

The Bank of England (BoE) hiked interest rates by 25 bps to 1.25% yesterday as was widely expected. The pound first declined but then rose when the market digested the MPC statement about acting “forcefully” to adjust monetary policy.

While some economists have warned that the pound could remain subdued, others believe it can rise if it continues to hold on its recent gains.

BoE’s announcement

The Bank anticipates the economy to slow down and shrink in the second quarter while rising household energy bills will push inflation above 11% in October.

Three out of the nine Monetary Policy Committee (MPC) members supported a higher interest rate hike of 50 bps as persistent and higher inflation continues and central banks around the world are determined to curb inflation and hike aggressively. The US Federal Reserve announced a 75-point rate rise on Wednesday, which marks the largest single rate rise since 1994.

Inflationary pressures

Stock markets fell on Thursday as investors worried that rising interest rates would slow down growth and lead to recession, with the FTSE falling 3.14% to a three-month low.

Following Switzerland’s central bank unexpected rate rise, European shares also fell, and bonds prices dropped, while the S&P 500 was lower at around 3%.

Responding to the rising cost of living and Russia’s war in Ukraine which has exacerbated global energy prices, the MPC said it was prepared to bring inflation closer to its target rate of 2% and if necessary “act forcefully in response.”

UK economic concerns

The Bank of England’s decision to limit its interest rate rise to a 0.25-point increase highlights its concerns over economic growth after recent disappointing growth readings, the cost-of-living crisis, the limited spending power of struggling households and businesses facing staff shortages and supply chain issues. The risk of recession has also led the Bank to downgrade its growth forecast for the second quarter of the year. The UK economy shrank unexpectedly in April after a fall in March.

British households are currently struggling with a surge in living costs as inflation reached 9% in April. While Rishi Sunak’s £15bn package will provide support to the economy, the BoE warned that it would also add 0.1 percentage points to inflation within the first year as it would boost strong consumer demand for goods and services.

The Bank of England’s governor Andrew Bailey said further rises in household energy bills expected this October would push inflation above 11% in October. In a letter to the chancellor, he said a “succession of global shocks” were affecting the economy and that “The MPC will take the actions necessary to return inflation to the 2% target sustainably in the medium term.

In terms of the pound’s performance, at least in the near term, it appears that the pound will struggle to hold on tight to its recent gains as investors reassess the BoE’s gradual approach to policy tightening.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

Markets are expecting the Bank of England’s interest rate decision today at midday and economists have warned that unless the Old Lady of Threadneedle street sounds hawkish and hikes by at least 50 basis points, the pound could fall.

The foreign exchange markets are expecting a higher than a 25-basis point rise, as UK inflation has risen at 9.0% and could reach double digits later in the year. Additionally, the BoE needs to take into account other central banks which are raising interest rates higher. It has been noted that the currencies of those countries whose Central Banks have been slower to hike interest rates tend to underperform, whereas currencies such as the US dollar tend to rise when the Central Banks show a clear intent to hike interest rates faster and higher.

Analysts have noted that the Bank of England will need to defend Sterling and thus it will need to act accordingly and in a similar manner as the Federal Reserve which hiked interest rates on Wednesday by 75 basis points. Some analysts expect a rate hike by the Bank of England as high as 75 basis points in order to ensure that the pound strengthens, especially after falling to multi-year lows this week.

Conall MacCoille, chief economist at wealth managers Davy, has said that there is a strong case for the BoE to raise interest rates by as much as 50bps: “CPI inflation at 9% and a tight labour market are creating a risk that employee price expectations could become entrenched.”

Central Banks to raise rates aggressively

Former governor of the Bank of England Mark Carney has said in an interview with Bloomberg TV yesterday that “Central bankers need to catch up to their economies. They’ve been behind the curve, they’ve acknowledged this. And they need to start to get interest rates above inflation effectively, or at least inflation expectations.”

He added: “If you’re far behind, it does make sense to front-load.” Carney argued that central banks should front-load interest rate rises as they need to tackle rising inflation while supporting economic recovery.

Members of the BoE’s MPC have expressed similar views, but the MPC as a whole is rather dovish and traditionally is cautious and prefers to keep rates unchanged or deliver smaller rate increases.

Pound to fall if BoE is cautious

If the BoE signals an end to its hiking cycle, then the pound will weaken, as some economists have warned. Others believe that the pound’s performance will depend on the BoE’s commentary and domestic data in the coming months and that any further raise in interest rates will not provide much support. Most analysts believe that a 25 or 50-basis points rate hike will not lift the pound and that a bigger move will be necessary.

With the UK’s expected economic slowdown and inflation falling eventually, some of the Bank of England's MPC members would argue that raising interest rates would hurt growth.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.