The Bank of England monetary policy meeting is scheduled on the 4th of August and the UK central bank is expected to hike interest rates by 50 bps. Analysts have noted that the pound will be influenced by external factors and the GBP/USD pair will be guided by US dollar dynamics and data. Against the euro, the pound is expected to rise given the challenges that the bloc is facing.

What do the analysts expect?

Analysts at TD Securities (TDS) said that they anticipate “the MPC to hike Bank Rate by 50bps, with likely 3-4 members preferring a 25bps hike, and a message that cautions against extrapolating 50 bps hikes into the future. Early details of active Gilt sales should be announced, but no decision yet made.”

Similarly, analysts at ING also expect a 50bp rate hike from the Bank of England next week. As they said, policymakers have promised to act forcefully to get inflation under control and a 50bp move sounds the reasonable thing to do. However, they have cautioned that “the window for further rate hikes feels like it's closing. Markets have already pared back expectations for ‘peak’ Bank Rate from 3.5% to 2.9%, though that still implies two further 50bp rate hikes by December, plus a little more thereafter.”

What are some of the factors that will influence the BoE’s decision?

  • Recession fears are a valid concern. Demand has weakened and a technical recession is a possibility. The real cost of living squeeze will be felt more clearly by the fourth quarter, with gas prices at all-time highs. Analysts at ING believe that a lot will depend on whether the government offers some form of compensation to industries that depend on energy and whether consumer spending increases in the autumn.
  • Core inflation may have peaked as supply issues start to improve and used car prices fall.
  • Consumer inflation expectations may have also peaked. The rise in expectations this year has been central to officials’ calls for faster rate rises. If expectations continue to fall, then policymakers might become less vocal about raising rates.
  • The jobs market is another important factor. Domestically driven inflation could remain high if there are no further signs of labour supply improving. There’s been no improvement in hiring challenges, but the number of inactive workers has begun to fall, and the jobs market is no longer tightening. However, lower inward EU migration and an increase in long-term illness have resulted in staff shortages.
  • Future tax cuts could lead the BoE to raise interest rates further. Foreign Secretary and Conservative leadership candidate Liz Truss has promised cuts to both individual and corporate tax rates, which could total around 1.5% of GDP in additional stimulus. Technically, the Bank of England might have to hike rates 25-50bp further than it might otherwise have done.
  • Central Banks around the world add further pressure. While there is pressure from central banks that take a more aggressive approach to monetary policy tightening, the Bank of England has resisted tightening faster and meeting market expectations. However, more vocal policymakers have called for higher rates to push a weaker pound higher.

In a speech last week, Governor of the BoE Andrew Bailey said that a 50 basis point hike wasn’t off the table as the Bank is determined to bring inflation back down to its 2% target. Bailey said: "At the MPC's last meeting we adopted language which made clear that if we see signs of greater persistence of inflation, and price and wage setting would be such signs, we will have to act forcefully." He added: “In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet.” Some analysts remain sceptical that the pound will remain strong after next Thursday’s interest rate decision, since the BoE may sound dovish even if it delivers a 50bps rate hike. All these of course will become clearer next Thursday.

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 rose against both the euro and the US dollar after the Fed’s decision yesterday to raise interest rates a further 75 basis points. Ahead of next week's Bank of England policy update, and with limited economic news, the pound will be influenced by broader market sentiment.

While the Fed’s decision was anticipated, the guidance provided has relieved markets as the Fed doesn’t intend to accelerate the pace of rate hikes. This, however, did not offer support to the US dollar.

The pound could strengthen further if the positive market sentiment continues over the coming weeks, analysts have noted.

The Fed adds more pressure on the Bank of England

The Fed’s rate hike of 75bps for a second straight month has added more pressure on the Bank of England. The BoE will have to act more forcefully to combat rising prices.

The US central bank kept up the fast pace of interest rate increases and promised to raise borrowing costs even further despite concerns about a slowdown in the economy. It is the first time US rate-setters have decided on such drastic rate hikes and analysts point out that their move would force other central banks to act.  

While the Fed will start to slow their rate hike cycle as demand has dropped, Fed chairman Jerome Powell has signalled that further US increases will be coming soon.

With real GDP shrinking as it was revealed on Thursday, due to rising inflation, economists have argued that the Fed should have tightened much more quickly, much earlier on. The mistake now will be for the Fed to back off tightening and allow stagflation to persist. What is clear now is that the primary goal for the Fed is the need to reduce inflation, which perhaps is what other central banks need to realise too.

This draws attention to the Bank of England, which is now under pressure to curb inflation, especially as the elections begin for the party’s next leader.

Bank of England interest rate rise

The Bank is considering a 0.5 percentage point increase ahead of its meeting next week. This will be the biggest rate hike in almost three decades.

The BoE, the Fed and other major central banks face a difficult task as they need to tame inflation while not throwing their countries into a potential recession. Powell said the US is not currently in recession but stated there are growing signs of a slowdown as monetary policy tightens.

A Reuters poll of economists found that the Bank of England (BoE) will likely avoid a bigger interest rate rise on the 4th of August and instead stick to the more moderate 25 basis point increase it has been delivering. There was speculation that the BoE would deliver a larger rate hike based on Governor Andrew Bailey’s recent comments of a half-point hike being a possibility.

A majority of respondents expect Bank Rate to be at 2.25% or higher, compared with 1.75% in the previous poll. The poll gave a median 55% chance of a recession in the coming year, with 30% economists seeing at least two consecutive quarters of contraction.

11 of 18 respondents said the current cost of living crisis would persist for over a year before it eased significantly.

Whether the Bank of England will deliver a 50 basis point rate hike next Thursday or a smaller one, many analysts argue that the window for further hikes is closing, as recession fears have increased.

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The pound gained some fresh impetus against the US dollar on Wednesday due to dollar weakness and risk-on sentiment. Market participants will wait for the key FOMC decision later on Wednesday.

Before the key central bank event, traders would focus on the release of US Durable Goods Orders which along with market risk sentiment could drive demand for the dollar and create trading opportunities for the pound to dollar currency pair.  

Fed interest rate decision

The US dollar was unable to gain traction due to expectations that an economic slump would force the Fed to decrease the pace of its policy tightening. In addition, the safe-haven dollar was weakened by a quick recovery in the stock markets, which in turn provided some support for the GBP/USD pair.

The US central bank is likely to raise interest rates by 75 basis points to curb high inflation when it makes its announcement later in the US session. However, due to the deteriorating economic outlook and escalating recession fears, market participants are still split on the necessity for further aggressive rate increases.

The expected increase in the target federal funds rate is estimated that it will hurt economic activity. It will be one of the fastest and bigger changes in monetary policy. There has been little progress in fighting inflation, while signs that the economy is under pressure are rising. Fed officials have the difficult task of weighing how much tighter monetary policy needs to be to slow inflation against the risk of triggering a recession.

The US economy "is likely to have contracted in the first half of the year, but job growth remains robust. Inflation is leading to record-low consumer sentiment, but consumers are still spending," Greg Daco, chief economist at EY-Parthenon, wrote this week.

Investors will therefore keenly monitor Fed Chair Jerome Powell's remarks at the post-meeting press conference for clues regarding short-term policy. This in turn would impact on near-term USD price dynamics and the direction of the GBP/USD pair.

Bank of England interest rates

The British pound gained some additional support as traders believe that the Bank of England will increase interest rates by 50 basis points at its upcoming policy meeting in August. The pound, however, may suffer from Brexit uncertainty.

Since the inflation rate has already reached a record high of 9.4%, the UK economy is already experiencing difficulties and the Bank of England will find it more challenging to act, as the latest economic data has been weak. While the BoE will have to raise interest rates, decreased demand and slower wage growth would intensify recession fears.

Policymakers at the BoE will weigh up whether to raise interest rates to stop inflation from becoming entrenched in the economy. Since December, the BoE has raised rates five times and has said in June it was ready to act forcefully if needed.

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.

 

Sterling has retreated from three-week highs as risk-off sentiment prevails due to the escalating European gas crisis and fears of an impending German recession.

Investors seek the safety of the US dollar, as a safe-haven asset. As investors become more cautious ahead of the Fed's anticipated announcement of a possible 75-basis point rate hike, the dollar has found demand.

There is little cause for optimism on the UK political front, where contenders Rishi Sunak and Liz Truss are engaged in a leadership contest.

Money markets predict a risky 50-bps increase rather than a cautious 25-bps increase ahead of the Bank of England (BoE) rate decision next week. However, economists are far less certain, with 25 out of 54 questioned by Reuters anticipating an increase of 0.5 percentage points.

This week's key event will be the FOMC decision due on Wednesday.

Euro weakens due to fears of Russian gas supplies

After Russia claimed there are some issues with another Nord Stream turbine, the euro fell sharply on Tuesday, July 26.  Russia appears determined to restrict gas shipments to Europe in retaliation for Europe's support for Ukraine.

Around 35% of Europe's energy needs are met by imports from Russia, while this country receives 70% of its energy earnings from the EU.

German business confidence plummeted to the worst level since the early months of the epidemic. A measure of expectations released Monday by the Munich-based Ifo Institute, showed that Germany is on the brink of a recession, due to high inflation and limited energy supplies from Russia.

Markets will be looking at Europe in the coming days and months, as gas prices will continue to be a serious source of concern. Therefore, the euro will continue to suffer from tighter gas supply and rising costs.

UK retailers hit by a drop in sales

British retailers feel gloomy about the outlook for August, after being hit again by falling sales this month. According to the CBI's most recent "distributive trades" report, retail sales volumes decreased in July as demand was hampered by the rising costs of living.

The CBI's July retail sales balance increased somewhat from June's -5 to -4, but August estimates fell to -14. Since March 2021, when many stores were still subject to Covid-19 lockdown restrictions, this reading has been the lowest.

However, this time, consumers have even less purchasing power due to declining real salaries and rising costs for commodities.

As customers struggle to deal with the effects of the cost-of-living problem, retail activity will continue to suffer.

After a sustained period of expansion dating back to March 2021, sales volumes declined as inflation rose and economic growth slowed down. Retailers also stated that their stock levels were at their highest point since July 2020 in relation to anticipated demand, but this means that if demand falls shops will have too much stock. On the other hand, this also suggests that supply chain issues have eased.

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Markets remain in a risk-off mood due to recession fears and uncertainty surrounding the UK leadership.

British PM candidate Liz Truss has set out her investment plans while Rishi Sunak said in an interview on Friday that he would put the government on a crisis footing from "day one" of taking office.

The pound continued to find support from rising expectations of a 50-bps Bank of England (BoE) rate hike in August, especially after the S&P Global UK Preliminary Services and Manufacturing PMIs came our better than expected.

Despite the persistent cost-of-living crisis, investors are still concerned that the UK government's contentious Northern Ireland Protocol Bill could start a trade war with the EU. In addition, concerns over a worldwide economic slowdown may provide some support for the safe-haven dollar and limit any significant advances for the GBP/USD pair. Ahead of significant data and events, investors might be hesitant to make any aggressive moves and they might take a wait and see approach.

The focus this week, however, remains the Fed rate hike. Ahead of that, traders will look forward to UK political news and the US Durable Goods Orders data for further trading insights. On Thursday, the Advance US Q2 GDP report will also draw attention and will influence the US dollar and determine the near-term direction for the GBP/USD pair.

CBI’s Industrial Trends survey

On Monday, the release of the CBI’s latest “Industrial Trends” survey showed that UK industrial output growth was at its weakest since April 2021. Output balance dropped to +6 for July from +19 in April. The monthly CBI industrial orders balance dropped to +8 from +18, its lowest since October. Quarterly inflation expectations dropped to +48 from April's record high of +71.

Demand at home and abroad was shown to have eased. Anna Leach, CBI Deputy Chief Economist, said: “The manufacturing sector has been an economic bright spot in recent months, but output and orders have softened amid ongoing cost pressures, supply challenges and a generalised weakening in economic conditions both in the UK and globally.”

However, there were some positive signs that inflation and investment challenges have eased. Firms reported that price pressures improved, with metal, plastics and electrical goods manufacturers reporting a slowdown in rising costs. Investment plans were higher as businesses sought to expand.

Bank of England interest rate hike

The Bank of England's Monetary Policy Committee (MPC) will have to decide next week whether to raise interest rates higher and at a faster pace to control inflation. The highest inflation in decades, has hit consumer sentiment which has fallen to its lowest since records began in the 1970s.

Pantheon Macroeconomics's Gabriella Dickens said: "The combination of flat-lining demand and slowing price growth in the manufacturing sector therefore strengthens the case for expecting the MPC to stick to 25 basis-point hikes at its two meetings in Q3, rather than jumping to 50 basis-point hikes."

BoE policymakers have expressed pessimism on Britain's ability to meet demand in the medium to long term, in part due to low investment by worldwide standards. Even with modest growth, higher interest rates may be necessary to control inflation if investment and productivity do not increase.

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 is under pressure, after the release of disappointing retail sales on Friday. UK retail sales fell 0.1% month-on-month in June, which is better than the market’s expected -0.3% reading and May’s -0.8% number. Core retail sales rose 0.4% said the ONS, beating expectations for -0.4%.

The numbers show that sales were down 5.8% in the year to June, a number that is lower than the market’s expected -5.3%.

While core retail sales were slightly higher, spending fell sharply. The data supports the belief that the Bank of England will go for a 25-basis point hike in August. This move will disappoint markets which have already priced in a 50bp hike and could weaken the pound. With rising inflation, UK consumers will continue to struggle.

UK retail sales in detail

UK retail sales dropped for the second month in a row and analysts say this is a sign that the economy is slowing. Retail sales are seen as a measure of the UK’s economic health which relies on consumer spending. So, Friday’s retail sales data suggests that consumption is weakening and further weakness for the currency lies ahead, particularly against the Dollar.

While food sales volumes rose by 3.1% due to the extra bank holiday for Queen Elizabeth’s jubilee celebrations, retail sales overall declined. As Paul Dales, Chief UK Economist at Capital Economics said, people were “stocking up on sausages rolls, cakes and alcohol for Jubilee street parties." However, he warned that “the surge in inflation and resulting big fall in real household disposable incomes means that a recession is now inevitable.”

Retails sales: What the economists said

The British Retail Consortium, a lobby group, said that UK consumers will face “hard days ahead.” Its chief executive, Helen Dickinson, highlighted the damage of inflation on consumer confidence. As she said, “Discretionary spending and particularly bigger purchases were put off as consumers become increasingly concerned about the future. As a result, furniture sales and white goods were particularly hard hit, while food sales held up a little better.” This is then the most difficult period since the pandemic started as retailers face higher costs and weaker demand.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “Households are continuing to spend more on goods, but are getting less in return.” Tombs said that the retail sales will probably rise in the third quarter of the year as the threshold for national insurance contributions and cost of living payments increase. Similarly, household’s real disposable incomes will also increase in the third quarter, which will push retail sales higher. However, disposable incomes could fall in the fourth quarter, as any support from the government will not make up for the impact on real disposable incomes which will be further affected by October’s 65% rise in the energy price cap.

The pound will likely remain under pressure for as long as market sentiment towards the UK economic outlook remains challenged.

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 euro rose against the pound on Thursday and exceeded its two-week high. The ECB raised interest rates by 50 bps and the unexpected positive news pushed the shared currency higher.

ECB rate rise

The ECB’s governing council was more determined than expected and chose to hike the key interest rates by 50 bps instead of the 25 bps that markets expected. Policymakers decided to act as inflation has increased and it was time to exit the negative interest rates regime.

Transmission Protection Instrument

The ECB also revealed a new tool called “Transmission Protection Instrument” to stop rising borrowing costs from triggering a debt crisis as the political turmoil in Italy continues. In a statement, the ECB said: "The TPI will be an addition to the Governing Council’s toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area."

The market has welcomed the ECB’s decision to offer the TPI tool without any restrictions as it could provide unlimited support to a distressed country. "The scale of TPI purchases depends on the severity of the risks facing policy transmission. Purchases are not restricted ex ante," the ECB said.

Ending negative interest rate policy

This is the first hike since 2011. The ECB raised its three key interest rates by a half a percentage point, surprising markets. As ING Bank’s Global Head Carsten Brzeski said: "A historic day for the European Central Bank. For the first time since 2011, the Bank has hiked interest rates and did so with a bang. Hiking rates by 50bp and softening forward guidance shows that the ECB thinks the window for a series of rate hikes is closing quickly."

The ECB said: "It is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting...This decision is based on the... updated assessment of inflation risks.”

The president of the ECB, Christine Lagarde explained that the “impact of high inflation on purchasing power, continued supply constraints, and higher uncertainty are having a dampening effect on the economy.” These problems are evident in Europe and around the world.  She also highlighted the gloomy economic outlook: slowing economic activity, Russia’s invasion of Ukraine, weak consumer confidence and the challenges businesses face with higher costs and supply chain disruptions. Like other Central Banks, the ECB decided to raise interest rates amid fears of a possible recession.

Further rate hikes

ING said the decision to begin the hiking cycle with a 50bp move suggests the ECB will be unable to deliver as many rate hikes in the next 12 months as markets had priced in after the June meeting.

Lagarde also explained that the ECB are “much more flexible in that we are not offering forward guidance of any kind.” “The ultimate destination of our policy path remains the same, which is to progressively raise interest rates to a broadly neutral setting,” she said. Lagarde clarified that she did not know what that neutral rate might be, but “we will cross that bridge when we cross that bridge,” she added.

Like the Bank of England, the ECB said it will not provide detailed forward guidance but it will shift to “a meeting-by-meeting approach to interest rate decisions."

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 rose on Wednesday after the release of higher-than-expected UK inflation in June. The news has increased expectations that the Bank of England will go ahead with a big 50 basis point rate hike in August.

UK inflation data

The Office for National Statistics (ONS) reported that UK inflation came at 9.4% year-on-year in June which is higher than the market's expected 9.3% and up on May's 9.1%. Rising petrol and diesel prices and more expensive food have pushed annual inflation rate to a fresh 40-year high of 9.4%.

Last June, inflation was at 2.5% and has risen for nine months in a row, with the Bank of England expecting it to go above 11% when energy bills rise again in the autumn.

Markets anticipate the Bank to respond by raising interest rates by either 0.25 or 0.5 percentage points next month.

The ONS chief economist, Grant Fitzner, said: “Annual inflation again rose to stand at its highest rate for over 40 years. The increase was driven by rising fuel and food prices; these were only slightly offset by falling secondhand car prices.”

The cost of motor fuels had risen by more than 42% in the year to June, with petrol and diesel reaching their highest last month.

Food was another factor that pushed inflation higher, with sharp increases in the cost of milk, eggs, and cheese.

Core inflation – excluding food, energy, alcohol, and tobacco – stood at 5.8% last month, which was lower than 5.9% in the year to May.

Responding to today’s release, the chancellor, Nadhim Zahawi, said: “Countries around the world are battling higher prices and I know how difficult that is for people right here in the UK, so we are working alongside the Bank of England to bear down on inflation.” He added: “We’ve introduced £37bn-worth of help for households, including at least £1,200 for 8 million of the most vulnerable families and lifting over 2 million more of the lowest paid out of paying personal tax.”

Bank of England interest rate

Bank of England governor Andrew Bailey said yesterday at the annual Mansion House dinner that a half-point increase in interest rates was “on the table” for August. At the upcoming August meeting the BoE will also publish its plans to reduce the size of its balance sheet.

Inflation is above the Bank of England's 2.0% target and analysts have noted that the Bank needs to act. The Bank fears that inflation will generate more inflation as workers and businesses will respond to higher costs by demanding higher wages and increasing prices.

A 50bp hike will strengthen Sterling, while analysts said that anything less will push the pound lower.  

Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics said that the headline rate of CPI inflation could rise to nearly 12% in October. But core CPI inflation will remain on a downward path, and will ease to about 5.0% by year-end and to around 2.0% in a year.

Tombs believes that the Bank of England will end its current rate hiking cycle soon. He said that "a narrow majority of members will favour sticking to a 25bp increase in Bank Rate next month, and will stop the hiking cycle after one further 25bp increase in Bank Rate in September.” If anything as unexpected as this happens, then the pound could fall.

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.

 

 

Central banks raise interest rates to control rising prices - or inflation. When interest rates go up, economic activity slows, and unemployment often rises. Higher interest rates increase the cost of borrowing and encourage people to save more. While mortgage payments go up, savers gain. By raising interest rates, people spend less, which helps to push inflation down.

Therefore, if a central bank feels inflation is rising too quickly, it may try to control it by raising the base rate and pushing up interest rates.

Stronger currency

As interest rates rise higher, the currency of the specific country strengthens on the foreign exchange markets, and that helps to reduce the price of imported goods.

Decisions, Decisions: When do Central Banks decide to act?

As the Governor of the Bank of England (BoE) Andrew Bailey has mentioned, deciding when to act and how much further to raise interest rates is a delicate balancing act. The BoE must tread a “narrow path” between taming high inflation and supporting the economy.

The reason for saying this is that if a Central Bank raises rates too far, too fast, will further unsettle the fragile economic recovery and tip the country into a recession.

Central Banks raising interest rates to curb inflation

At the moment, central banks around the world are pushing for the sharpest rise in interest rates in decades in response to soaring inflation. With living costs across advanced economies rising at the fastest rate per year since the 1980s, the US Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) are taking aggressive action to ease inflationary pressures.

Reasons that inflation has risen dramatically

  1. The impact of the Covid pandemic
  2. Supply chain disruption
  3. Worker shortages
  4. Russia’s war in Ukraine driving up energy prices.

Inflation across the OECD group of wealthy nations has reached 9.2% which is the highest since 1988. Britain has the highest rate in the G7 group of rich countries with inflation hitting 9% in April, the highest since 1982.

Inflation target

Central banks have mandates from their national governments to target low and stable inflation, typically of around 2%, while also considering the health of the economy and outlook for jobs.

When central banks aggressively raise rates to control inflation, they hope to show how committed they are to bring inflation back to their target. They want to prevent expectations that higher inflation will become embedded as workers would start demanding higher pay or companies would keep putting up their prices.

How higher interest rates affect you?

When a central bank raises interest rates, high street lenders pass these increases on to consumer and commercial borrowers and savers which can result in higher mortgage costs.

If you have a mortgage with standard variable rates, you will see the difference. With those on fixed-rate mortgages, the higher costs will become apparent when you come to the end of your term. For example, analysts at Hargreaves Lansdown estimated that, when the Bank raised interest rates in May by 0.25 percentage points to 1%, mortgage payments would have gone up by over £40 per month.

If you are renting, buy-to-let landlords could pass on higher borrowing costs to you.

What are the dangers of higher interest rates?

Economic growth could stall if there is weak consumer demand. With living costs already hitting consumers’ spending power, this could worsen the risk of recession.

Britain’s economy is forecast to slow to a halt next year, with the country expected to fall to the bottom of the OECD’s growth league table, just above Russia.

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 to US dollar exchange rate first dropped and then rose again following the release of UK employment data from the UK Office for National Statistics (ONS). The Unemployment Rate has remained flat at 3.8%, while the Claimant Count Change has fallen to 20K from the prior release of -34.7k.

The news that will hurt the pound and market participants is the Average Hourly Earnings which have dropped to 6.2%. The release of the earnings data is disappointing, as households are facing higher price pressures, which have cut the value of their pay checks and the quantity of their total personal consumption expenditure.

UK employment figures

According to the ONS labour data released on Tuesday morning, UK unemployment has held at 3.8% in the three months to May.

Meanwhile, 296,000 more people entered the jobs market, which was the largest increase since the three months to August 2021. The higher number suggests that inflation and the cost-of-living crisis have not yet affected employers’ decisions to hire and keep staff.

The new chancellor Nadhim Zahawi has reacted to both the employment figures and hit to pay, but has chosen to focus on the strength of the jobs market:

“Today’s figures underline how strong our jobs market continues to be, providing encouragement in uncertain economic times – as we know being in work is one of the best ways for people to get on and support their families.

I am acutely aware that rising prices are affecting how far people’s hard-earned income goes, so we are providing help for households through cash grants and tax cuts.

We’re working alongside the Bank of England to bear down on inflation, providing support worth £37bn this financial year for the cost of living, and investing in skills to help people get into work and progress.”

UK living standards fall as real pay drops

The data shows a mixed picture of the UK labour market. British workers’ living standards fell in May at a record rate after pay rises failed to keep pace with inflation.

While earnings growth rose across the private and public sectors by 4.3% in the three months to May excluding bonuses, that means pay experienced a record fall as it was down by 2.8%. This was the sixth monthly decline in a row, and the biggest fall since modern records began in 2001. With inflation continuing to rise, economists have warned that there is worse to come in the coming months.

Average pay growth including bonuses for the private sector was 7.2% in the three months from March to May, while for the public sector it was 1.5%, leaving an average of 6.2%.

The Bank of England has said that inflation will reach above 11% after energy bills rise again in the autumn, which will add more pressure on household budgets.

According to the latest economic analysis, the economy is speedily reaching crunch point. “If average regular pay is rising by just over 4% and annual inflation is running well above 10% then something has to give. That something will be consumer spending, with the lowest paid and most vulnerable workers suffering most.”

In terms of how influential Tuesday’s labour data is to the Bank of England’s policy committee, economists at ING have said that is unlikely to change their minds, and that the “mixed bag” data will give both doves and hawks enough information to argue their case at the next rate decision due 4 August. ING economists argue that the BoE will go ahead and deliver a 50bp hike at its August meeting.

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.