The pound was up against the euro on Wednesday, strengthened by higher UK bond yields and expectations of an earlier interest rate hike by the Bank of England. Sterling rose to a three-week high against the euro yesterday, as traders returned their attention to the prospect of interest rate hikes in Britain. The pound was down last week, due to rising inflation concerns, but it has now recovered.

Sterling’s recovery is mainly due to the prospect of the BoE raising interest rates sooner than expected, but analysts have commented that the pound should have risen even higher especially because of the important difference between the European and UK central banks. While the BoE has clearly stated its intention for an earlier rate hike, the European Central Bank has no plans to raise rates soon. Economists have warned that caution should be exercised though, as the pound’s gains might not be long-lived. It is still unclear whether the BoE will proceed to raise interest rates while the UK is facing ongoing supply problems.

Inflation

On Tuesday, British Prime Minister Boris Johnson said inflation fears were baseless. The final reading of the IHS Markit/CIPS composite Purchasing Managers’ Index showed that companies increased prices at the fastest pace on record, following shortages of staff, raw materials and transport.

Brexit

The pound has yet to react on Brexit risks after the UK told the European Union on Monday it would  “trigger safeguard measures in their divorce deal if the bloc failed to agree to changes to smooth trade with Northern Ireland.” Speaking at the Conservatives' annual conference in Manchester, Brexit minister David Frost stated that "Without an agreed solution soon, we will need to act, using the Article 16 safeguard mechanism, to address the impact the protocol is having on Northern Ireland." The EU is putting together a package of measures to ease the passage of goods from Britain to Northern Ireland, using flexibilities in the protocol, which will announce next week.

Tighter policy could weaken pound

Goldman Sachs Asset Management has said that tighter policy could weaken Sterling. The firm’s strategist for the global fixed income team said that high inflation and energy prices, and Brexit implications could further complicate the inflation outlook. Fears of higher inflation combined with the ongoing supply-chain crisis and an end to the government’s furlough program have worried investors who believe the BoE may choose to raise interest rates sooner than necessary, risking economic recovery.

Other firms and financial analysts are less concerned as challenges are not seen as dangerous and are merely transitory. They don’t believe that the Bank will be forced into a dangerously fast pace of tightening.

What to watch

A key indicator to watch is the UK's labour market as unemployment is expected to increase in October since the government's job support scheme ended on the 30th of September and furloughed staff might not be able to return to their old jobs. The furlough scheme which started in March 2020, supported 11.6 million jobs across the UK and government figures suggest that around a million people were still on furlough when it ended.

If unemployment is lower than expectations, the consensus is that the Bank could move towards a rate hike as a strong labour market will increase the potential for wage rises which push inflation higher.

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The pound rose against the US dollar following strong UK labour-market numbers. British employers added a record 241,000 staff in August, pushing the total number of employees on company payrolls above pre-pandemic levels, official data showed on Tuesday.

The latest unemployment report by the Office for National Statistics shows job vacancies rose above one million for the first time since records began as the UK economy continues to recover from the Covid-19 pandemic, while payrolls rose by more than expected. The strong data will possibly help persuade Bank of England policymakers that perhaps UK monetary policy could be tightened sooner than expected.

Jobs data

The latest unemployment report showed the number of vacancies in the three months to August to have reached above one million, as firms struggled to fill positions mainly in the hospitality, transport and storage sectors. It also showed a lower unemployment rate and a monthly increase in August payrolls.

The ONS stated: “The fastest rate of growth was seen in other service activities, which grew by 93.3% (12,500), followed by transport and storage at 76.3% (20,300) and accommodation and food service activities at 75.4% (57,600). In the latter two categories labour demand has increased rapidly while staff availability fell because of a mix of employees leaving these sectors to find employment elsewhere and a reluctance of workers to return to their previous roles.”

Minister for Employment Mims Davies MP has welcomed the rise in payrolls and said: “As we continue to push ahead with our recovery, it’s great to see another significant fall in unemployment and the number of people on payrolls rising by 241,000 in August – the biggest monthly increase on record – showing our Plan for Jobs is working. We’re helping employers recruit for the record number of vacancies out there, particularly in growing sectors, and supporting people of all ages and backgrounds to overcome barriers, land their next role, and progress in work.”

While payroll employment is back at pre-pandemic levels, there are still many years ahead of recovery, with employment more than 700,000 down and long-term unemployment up 45%. There are still more than a million people furloughed and with the scheme ending this month, more people will be looking to find employment.  

Furlough scheme concerns

Economists and politicians are worried that with the furlough scheme ending this month, jobs recovery will be hurt, after the rise in payrolls and vacancies. A lot of furloughed staff might not even return to their jobs as a lot have had their wages subsidised and might not be kept into full-time employment.

There is also a skill shortage as many industries have reported a lack of available labour and hiring difficulties. With Covid adding more uncertainty after Brexit and the new national insurance tax adding more costs to employers, it is unclear how businesses will respond to future hiring needs.

While the data is positive for the pound, investors remain cautious ahead of Wednesday’s UK inflation data, which could show an increase in the core rate in August to 2.9% year/year from July’s 1.8%.

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.

Budget 2021: Pound to Remain Sensitive

Rishi Sunak’s budget has unnerved the pound as investors have been waiting to hear the details. A bullish scenario for the UK currency will be the announcement of more financial support to help recovery, while any attempt to balance the book that will affect growth will hurt the pound.

Main Points: What did Rishi Sunak say?

The chancellor said that he would do “whatever it takes” to help the economy recover from the pandemic as the damage has been great. It is estimated that more than 700,000 people lost their jobs, the economy shrank by 10% and borrowing has been at its highest. Sunak noted: “It’s going to take this country, and the whole world, a long time to recover from this extraordinary situation.”

He has underlined his own and the government’s desire to be clear and transparent about fixing the public finances, and about what plans they have in the future.

Growth

Expectations are for a quick recovery by the middle of next year. However, the economy will still be 3% smaller even in 5 years from now. GDP will grow by 4% this year, and by 7.3% next year. The coronavirus has profoundly affected the economy and Sunak’s comments suggest that tax rises should be expected in the near future.

Furlough

The chancellor said that unemployment will reach 6.5%, which will be much less than originally forecast, with 1.8 million fewer people expected to lose their jobs. The furlough scheme will continue until the end of September. Employees will receive 80% of their wages until the end of the scheme but businesses will have to contribute 10% in July and 20% in August and September. The self-employment income support scheme will also be extended and the £20-a-week uplift in universal credit will be extended for six months.

Grants for Businesses

Sunak announced a £5bn restart grant for businesses and noted that the total direct cash support to businesses has reached £25bn. The Treasury is also starting a new loan scheme with loans ranging between £25,000 and £10m.

Spending

£352bn will be the Covid support package this year and the next and Sunak underlined the amount that was spent to help the economy recover.

Borrowing

Sunak said the budget deficit will be £355bn this year and will continue at high levels with the underlying debt rising indefinitely. He said that due to his actions, borrowing will fall to 4.5% of GDP in 2022-23, then to 3.5% in 2023-24, and 2.9 and 2.8% in the following two years. He added: “It’s going to be the work of many governments over many decades to pay it back, just as it would be irresponsible to withdraw support too soon, it would also be irresponsible to allow our future borrowing and debt to rise unchecked.”

Corporation tax

In April 2023, the rate of corporation tax will go up to 25%. But Sunak explained that this will affect businesses that are making profits of more than £250,000 and will be taxed at the full 25% rate. Companies with profits of less than £50,000 will remain at 19%.

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