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 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 strengthened after the release of better-than-expected UK GDP data for May on Thursday. The UK GDP rose 0.5% in the month to May according to the Office for National Statistics (ONS).

In the three months to May the economy grew 0.4% beating expectations, as economists predicted zero growth.

About UK GDP

The Gross Domestic Product released by the National Statistics measures the total value of all goods and services produced by the UK. The GDP is a broad measure of economic activity, and if it goes up, is seen as positive for the pound, and vice versa.  

All components of the UK economy contributed to the positive data, with manufacturing production increasing 2.3% in the month to May. Health services were a major driver of growth, with a large rise in GP appointments.

Industrial production grew 0.9% and construction output increased 4.8%. The services sector rose 0.1%, also beating expectations.

British finance minister Nadhim Zahawi commended on the stronger-than-expected UK GDP data and said: "It’s always great to see the economy growing but I’m not complacent. We’re working alongside the Bank of England to bear down on inflation and I am confident we can create a stronger economy for everyone across the UK."

UK economy outlook

May’s GDP data has not changed economists’ expectations for a contraction in the second quarter, as Gabriella Dickens, Senior U.K. Economist at Pantheon Macroeconomics warned.

Consumer confidence readings are also lower which confirms the services sector will experience further troubles ahead.

Dickens said: "Nonetheless, a recession—two consecutive quarters of negative growth—remains unlikely. Households’ real disposable incomes should rise in Q3, in response to the increase in the threshold for NI contributions and Cost of Living grants from the government."

While the UK economy rebounded in May after shrinking in April and March, businesses reported higher running costs. The increase in fuel and electricity costs forced businesses to raise their prices for customers.

Paul Dales, chief UK economist at Capital Economics, said that with household disposable incomes expected to fall further there was still a real risk that the economy could fall into a recession. In general, economists noted that despite the upbeat data, there was no significant indication that the momentum would change considerably.

Both businesses and households are having to deal with rising prices, and inflation is expected to reach 11% later this year.

Andrew Bailey, the governor of the Bank of England, has pledged to bring inflation down to its target of 2%.

The new chancellor Nadhim Zahawi, said that he knew people were concerned by rising prices and that the government was going to work closely with the BoE to curb inflation and strengthen the economy.

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 dropped to a 20-year low over worries about weak growth and rising fears that Russia might turn off gas supplies to Europe.

After the downside move, the euro has recovered slightly on Tuesday. However, markets expect the euro to continue falling if the odds about an escalation in the policy divergence between the European Central Bank (ECB) and the Bank of England (BoE) increase further.

BoE Governor Andrew Bailey said that the UK economy is facing a very large real income shock which has raised the likelihood of one more rate hike by the BoE. The inflation rate has reached to 9.1% and economists expect a two-digit inflation figure.

Gas supply fears rise after Nord Stream 1 shutdown

Russia turned off the biggest pipeline which carries gas to Germany on Monday for maintenance. The Nord Stream 1 pipeline will be shut for 10 days, but governments, firms and markets are worried that the shutdown could be extended because of the war in Ukraine. Fears over a complete shutdown of gas supplies to Europe have raised recession risks in the region.

If Russia decides to turn off gas supplies to Europe, countries could face gas rationing with industries potentially having to suspend work while families would struggle to heat their homes.

Robert Habeck, Germany’s economy minister, expressed his concerns on Saturday referring to the “nightmare scenario” where Russia halts the flow of gas permanently. Talking to the broadcaster Deutschlandfunk, Habeck said: “Everything is possible, everything can happen. It could be that the gas flows again, maybe more than before. It can also be the case that nothing comes. We need to honestly prepare for the worst-case scenario and do our best to try to deal with the situation.”

Recession fears

The war in Ukraine has already pushed Europe into a recession as energy prices have soared and supply chains have been disrupted.

But investors are also worried about the renewed restrictions to control the outbreak of the highly-transmissible Omicron subvariant, BA.5 in many Chinese cities, including Shanghai.

The safe-haven US dollar strengthened from the global uncertainty. With US inflation close to a 40-year high, the Fed could be forced to proceed to more aggressive interest rate rises, which in turn will strengthen the dollar.  

The risk-off environment should continue to support the US dollar against the pound. Brexit concerns and the UK government’s controversial Northern Ireland Protocol Bill could also weigh on the pound. A less hawkish Bank of England will also keep the pound weak.

While the pound could weaken further against the US dollar, traders will wait for tomorrow’s macro data releases including the monthly UK GDP report and US consumer inflation figures. The broader market risk sentiment will also determine the direction of the pound, euro and US dollar.

 

 

 

 

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 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 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.