The pound rose on Tuesday as the US dollar experienced some selling for a second day. Risk sentiment was positive and investors were able to place riskier bets which has pushed the safe-haven greenback lower.

However, analysts have warned that the BoE’s pessimistic economic outlook could limit any upside potential for the pound.

The US dollar dropped for the second day which has helped push the pound higher.  While the US dollar made gains after Friday's impressive US monthly jobs data, the upbeat market mood has favoured the pound against the greenback.

Will the Fed continue its aggressive policy tightening?

Market participants believe that the Federal reserve will continue its hiking path as it is determined to get inflation under control. The market is currently pricing in 75 bps by the Fed at its September meeting.

This was reaffirmed on Saturday, when Fed Governor Michelle Bowman said that the US central bank will consider more 75 bps hikes at upcoming meetings.

The release of the US consumer inflation figures due out on Wednesday will be closely watched and would add more pressure on the Fed to act, if the inflation rates remain high.

Gloomy Bank of England outlook

In the meantime, the Bank of England's bleak outlook for the UK economy could keep traders from placing more trades on the pound as it is not clear yet whether the currency will strengthen.

The governor of the BoE Andrew Bailey said last Thursday at a press conference after the BoE Monetary Policy Committee’s decision that “Inflation hits the least well-off hardest. If we don’t act now . . . the consequences later will be worse.”

He added that policymakers have found themselves in a “very uncomfortable position” but “there are no ifs or buts in our commitment to the 2% inflation target”. Consumer price inflation hit a fresh 40-year high in June.

The bank has downgraded its growth forecasts as wholesale gas prices surged after Russia’s restriction of supplies. The BoE expects UK household’s annual fuel bill to reach to £3,500 pushing consumer price inflation above 13% by the end of the year.

Paul Dales at Capital Economics has said that “the bank is forecasting stagflation and suggesting that in the near term, the medicine is the tough love of higher interest rates and that further ahead the comfort blanket of interest rate cuts may be needed.”

The BoE’s warning that a recession will begin in the 4th quarter and last five quarters, has added to uncertainty.

With limited economic releases, traders will be extra careful and cautious. The broader market risk sentiment will provide some direction to the GBP/USD 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 Bank of England (BoE) has delivered a 50-basis point interest rate hike as it was expected, but disappointed markets with its gloomy economic forecasts. Analysts now warn that this will hurt the outlook for the British pound.

The Bank also signalled the potential for another large hike in September and promised to control inflation and bring it back to the 2.0% target.

UK GDP forecasts

It was the BoE’s latest gloomy projections that have pushed the pound lower. The BoE is the first central bank to forecast recession as it expects the UK economy to slide into recession in late 2022 and won't return to growth until 2025.

Analysts have stated that large rate hikes and the challenges that lie ahead for the UK economy, do not necessarily mean that the pound will strengthen.

The pound fell significantly at first, but losses were limited once investors began considering whether other central banks will do the same and forecast recession for their economies. If this does happen, then other currencies will also weaken.

Pound outlook

The pound is expected to weaken further in the coming weeks as some analysts have predicted. Markets are now anticipating a total of almost 100bp rate hikes this year. Some analysts expect a 50bp rate hike in September and a 25bp rate hike in November.

Other analysts have criticised the BoE for delaying raising interest rates at the beginning and being unable to manage inflation as UK economic activity weakens.

Analysts believe that a cocktail of high inflation and a weak growth outlook will be damaging for Sterling. MUFG predicts a weak outlook for the pound and expects the British currency to fall against the US dollar, reaching lows which have been seen earlier this year.

Future interest rate hikes by the BoE

The Bank of England’s chief economist Huw Pill has told Bloomberg TV that markets should not expect another large rate hike as the Bank is trying to keep its options open and “ensure there’s an element of flexibility” over borrowing cost changes.

Considering current uncertainties, Pill noted that flexibility was paramount and the pace at which the Bank moves further to be varied.

The Bank of England governor Andrew Bailey talking to the Today Programme urged businesses to avoid pushing for wage increases as this would fuel inflation and hurt those struggling the most.  He said that if everyone tries to beat inflation by setting higher prices or wages then inflation will get worse. Bailey explained: “I put this in terms of high pay rises and high price increases, because in that world it’s the people who are least well off who are worst affected because they don’t have the bargaining power. I think that is something that, you know, I would say broadly we all have to be very, very conscious of.” He said that the poorest with the lowest incomes will struggle with essentials such as food and energy and will be unable to offset the effects of inflation.

 

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The Bank of England could raise UK borrowing costs on Thursday by the highest amount since 1995, 27 years ago. City economists expect a 50 basis point rate rise that would lift Bank Rate to 1.75%, up from 1.25%.

There are concerns that hiking borrowing costs severely could push the UK into recession. However, the Bank’s Monetary Policy Committee (MPC) could procced to such a high increase to control inflation which has now reached a 40-year high of 9.4%.

BoE governor Andrew Bailey explained that the Bank could avoid increasing rates in quarter-point steps and that a half-point interest rate rise was “on the table.” At a speech at Mansion House in London, he noted: “Let me be quite clear: there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do.”

The MPC has already raised UK interest rates by 0.25 percentage points five times this year and economists expect one more substantial rate hike on Thursday before the economy begins to slow down and cool. It is not clear yet how the increase in energy prices and inflation will impact economic activity, or how the BoE rate rises will influence as they might take some time to have an effect. The question is how much the economy will be impacted, as this is going to affect the bank’s monetary policy decision moving forward. The Bank will release its own economic forecasts at noon and are anticipated to show inflation rising higher than it was expected three months ago.

How will the BoE MPC vote to raise interest rates?

The nine members of the Bank’s monetary policy committee will vote and decide how much to raise rates, with some members being more supportive of higher rates than others.

At the last meeting in June, three MPC members wanted a 50 basis-point rise, but the other six preferred a quarter-point increase to 1.25%. The three members that are more hawkish than the rest are Jonathan Haskel, Catherine Mann and Michael Saunders. Deputy governor Dave Ramsden, chief economist Huw Pill, and governor Andrew Bailey are expected to join them, while deputy governor Jon Cunliffe and external member Silvana Tenreyro are expected to be the most dovish and perhaps favour a smaller rate rise.

Is the BoE worried about a looming recession?

Speaking on the Today Programme, Torsten Bell, chief executive of living standards at think tank the Resolution Foundation, said that raising interest rates won’t push the price of gas down.  He explained that the Bank of England is “very worried” that a recession is coming as the UK economy has been hit by energy price increases after Russia’s invasion of Ukraine. As he said:

“Some of those wider shocks are easing and that’s to do with global supply chains and due to the spikes in global commodity prices that I was just mentioning, but others are getting worse and that’s to do with the Russian war and what that’s done to energy prices. That isn’t going to go away and interest rate rises are only relevant to that insofar as they prevent that becoming embedded in our wage setting processes in the months and years ahead. They can’t do anything about that actual rise in energy prices.”

So, the Bank may raise interest rates by 50 basis points today, but slow down after this, as there are concerns about the economy and a possible recession.

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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 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 fell sharply against the euro and the US dollar following a risk-averse market environment and disappointing data releases from the UK. On the other hand, the risk-off mood increased demand for the safe-haven dollar, while the euro surged to a near two-week high as markets have priced in an early ECB rate hike.

The pound came under pressure following cautious comments from Bank of England (BOE) officials and disappointing data releases from the UK. The Office for National Statistics reported on Friday that retail sales fell by 1.4% in March.

On Thursday, BoE Governor Andrew Bailey noted that UK inflation was more like that of the Eurozone than the US: "We must not be complacent about inflation expectations” as we are walking "a very tight line between tackling inflation, and the output effects of real-income shock."

Gloomy UK data releases

The risks for Sterling have increased following lower than expected economic releases. UK consumer confidence fell to very low levels last seen during the financial crisis of 2008, as consumers are now less confident about the economy.

Retail sales for April also disappointed with a reading -1.4% month-on-month in March. S&P Global's PMI data for April showed a further slowing in growth rates as inflation has surged.

Investors are cautious as they believe the Bank of England will disappoint markets who have priced in a more aggressive tightening cycle. With Friday’s release of gloomy consumer and PMI data, as well as political uncertainty at home and abroad, analysts have become more sceptical.

PMI data

PMI data showed that there was further slowdown in UK economic growth with the S&P Global/CIPS Services PMI Flash for April reading at 58.3, much lower than the 62.6 in March. Manufacturing PMIs came higher at 55.3, but services account for a bigger share of the economy. The overall Composite PMI came below the 59 forecast, at 57.6.

Demand was hurt from the cost-of-living crisis and economic uncertainty due to the war in Ukraine. Consumer confidence is very important as the UK is essentially a services economy and the way consumers and businesses spend their capital affects economic growth. The GfK said their UK consumer confidence measure is now "in freefall as Index crashes in April to -38." Joe Staton, Client Strategy Director at GfK said: “The cost crunch is really hitting the pockets of UK consumers and the headline confidence score has dropped to a near historic low." 

Retail sales

Retail sales for April dropped below expectations at -1.4% month-on-month in March, below the -0.3% markets expected. The March fall marks the second month that retail sales declined and demonstrated that the wage squeeze is affecting consumer spending.

Chief UK Economist at Pantheon Macroeconomics Samuel Tombs said that low consumer confidence means that households will withdraw their savings cautiously, but looking ahead, retail sales volumes are expected to fall further as households struggle with their finances and inflation continues to rise.

 

 How will the data affect the Bank of England’s decision?

The gloomy data will force the Bank of England to consider how fast it will hike interest rates as it shows an economy under pressure. The pound will also come under pressure as markets begin to cut back their rate hike expectations. With Inflation at a 30-year high of 7% and even rising higher in April, the Bank will be unable to curb inflation, as global oil prices and geopolitics are external factors outside its control. While the Bank needs to act by increasing interest rates, Friday’s data has undermined the pound with UK economic growth slowing down and hurting consumer purchasing power.

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

The euro rose against the pound and the US dollar after hawkish comments by European Central Bank (ECB) policymakers who have indicated that the ECB could raise interest rates as soon as July. The euro-pound exchange rate rallied to a near two-week high as a result of the comments.

ECB policymaker Martins Kazaks said on Wednesday that an ECB rate hike could be delivered as soon as July. Policymaker Pierre Wunsch told Bloomberg early Thursday that policy rates could rise this year and ECB Vice President Luis de Guindos added that he was expecting the QE to end in July to open the way for an interest-rate increase the same month.

Later, on Thursday, markets will focus on ECB President Christine Lagarde's speech which could also contribute to the euro’s strength. On the other hand, the British pound has struggled to gain any momentum. Investors will remain cautious, however, as concerns about the potential economic fallout from the war in Ukraine could deter traders from investing aggressively and limit any gains for the euro in the near term.

ECB comments

Various comments by ECB policymakers seem to be an attempt to prepare markets for an interest rate hike which in turn has raised European bond yields and supported the euro exchange rates.

On Thursday, ECB Governing Council member Pierre Wunsch said that the ECB could raise policy rates above zero before the end of the year: "Without any really bad news coming from that front (Ukraine), hiking by the end of this year to zero or slightly positive territory for me would be a no brainer.”

Comments by de Guindos have been taken more seriously as he is closer to the centre of the Governing Council, as analysts pointed out. de Guindos said that it was "crystal clear" that the ECB forecasts to be released in June will show higher inflation and lower growth expectations. But, the possibility of a recession and stagflation in the Eurozone was not likely and for this reason it was reasonable to consider tightening in monetary policy. He noted: "I see no reason why we should not discontinue our Asset Purchase Program in July... for the first-rate hike we will have to see our projections, the different scenarios.” He added: "From today’s perspective, July is possible and September, or later, is also possible. We will look at the data and only then decide."

Euro to remain supported

The ECB said earlier in March that it intended to end its quantitative easing in the third quarter, but this has moved sooner now. The earlier timing and higher number of rate hikes that are now being priced in for this year will be supportive of the euro.

The single currency had a difficult time recently as the ECB postponed any plans for interest rate hikes compared to other central banks who had moved to normalise interest rates. Even more recently, in its April policy update, the ECB struck a reserved and cautious tone and offered no indication for an imminent interest rate rise. The latest hawkish comments by Kazaks and de Guindos demonstrate a radical shift and perhaps reveal a change of thought at the central bank. Any further comments or similar developments could boost the euro further.

Traders will closely watch later today the appearances from the ECB President Christine Lagarde, FOMC Chairman Powell and Bank of England Governor Andrew Bailey who will speak at the IMF Spring meetings. Unless Lagarde disappoints markets by dismissing the idea of hiking the policy rate in early-Q3, the euro will remain supported.

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

The market remains cautious ahead of speeches from Bank of England officials later this Monday. Analysts have noted that any move higher for the pound to US dollar exchange rate will be limited, as Treasury yields have advanced further due to the hawkish Federal Reserve outlook, which could help support the US dollar.

BoE Governor Andrew Bailey’s speech

In particular, markets will focus on BoE Governor Andrew Bailey’s speech at the Stop Scams Conference at 10.05am (BST). Later at 3pm (BST), the Bank of England Deputy Governor Sir Jon Cunliffe will give a speech at a European Economics & Financial Centre seminar.

Bailey said last Monday at an event held by the Bruegel thinktank in Brussels that the situation remains very volatile in relation to May’s interest rate decision. Britain’s economy is expected to slow down amid the biggest shock from energy prices since the 1970s, the governor of the Bank of England has warned. He said that demand from consumers and businesses will also slow down due to the cost-of-living squeeze, with the prices for gas, electricity and other goods and services to continue to soar.

He said: “The shock from energy prices this year will be larger than any single year in the 1970s. The caveat is that the 1970s had a succession of years and we very much hope that would not be the case now. But as a single year, this is a very, very big shock.”

Bank will demonstrate a softer tone and act cautiously

Economists at MUFG Bank believe that weaker growth will force the Bank of England to act cautiously. They stated: “We see potential for the BoE to pause its tightening cycle after hiking in May and August as weaker growth throughout the remainder of the year will provide justification for that and act to weigh on GBP performance. We have revised lower our GBP forecasts based on a more cautious BoE given the weaker growth outlook.”

Consumer Confidence

The higher cost of living and surging food and energy prices have hit UK consumer confidence which is down to its lowest level since the pandemic.

According to a new report from PwC on Monday morning,  there was a “significant and sustained drop-off in consumer sentiment” with its index of UK consumer confidence falling to -20 this month, from +10 last summer. The 30-point drop in the last nine months is the biggest decline in PwC’s survey since Global Financial Crisis in 2008, with households facing the biggest squeeze in decades.

PwC has warned that the sharp drop shows the impact that the cost-of-living crisis is having across the UK. Lisa Hooker, Leader of Industry for Consumer Markets, PwC UK, explained:

“This shift in sentiment is both significant and sudden, with consumer spending expectations moving towards more essential areas at the expense of discretionary items. Businesses that help customers by offering them the options to trade down are more likely to keep their loyalty for when things get better.”

As PwC noted, those businesses that can help consumers now will benefit later, as consumers will remember and reward these businesses. They emphasised that consumers do not tend to switch to cheaper options but look for special offers within the same retailer or hospitality provider, so if such businesses trade down by offering special offers, cheaper brands, or set menus, they will more likely keep their loyal customers when things improve later.

Are you Transferring Funds Abroad?

If you are transferring funds overseas, contacting a currency specialist could save you time and money. Whether you are paying your employees or buying goods overseas get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

 

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.