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.”
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.
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