The pound has slightly dropped from its over two-month high which it reached this Wednesday, but the outlook remains positive with traders expecting additional gains. Researchers at Barclays also anticipate the pound to continue outperforming its major peers over the coming months.

The pound’s retreat today was not driven by any specific economic factor and could be attributed to traders readjusting their trades ahead of the all-important US consumer inflation figures.

Pound’s positive performance could continue researchers say

Markets generally believe that the pound’s strong performance in the first week of the new year was largely driven by expectations for a February interest rate hike and this could continue in the coming weeks and months.

The market now expects a ~75% chance of a second rate hike at the BoE’s February  policy meeting. This has also been further boosted by expectations that the US Federal Reserve will proceed to a faster and earlier interest rate hike cycle in 2022.

With inflation rising in both the UK and the US, markets expect higher interest rates in the US and the UK, which will support the British currency.

UK retail sales

The latest annual Retail Sales Monitor report from the British Retail Consortium (BRC) showed that sales grew, but consumer spending slowed the final weeks of 2021. The British Retail Consortium said that UK retail sales grew by 2.1% in December with growth coming in at 9.9% year on year. Government restrictions slowed spending, but in general the Omicron variant did not have a massive impact as retail sales held up through December. However, January is expected to be a more difficult month for the high street with footfall at UK outlets seen lower in the first week of January.

Businesses in the retail sector have warned that the spread of Omicron and the increasing costs of living could have a significant impact on sales this year.

Bank of England interest rate hikes

While a February rate hike would be the second interest rate rise in just two months, the total number of hikes to be delivered in 2022 is yet unknown and will be a crucial factor in the pound’s performance.

The Bank of England's unexpected December rate hike has led the market to believe that there will be more near-term rate hikes. As it becomes clearer how the Bank is expected to act and how many rate hikes will be delivered over the coming months, the pound will gain further support.

With the Omicron variant slowly subsiding and markets regaining optimism the British currency will also gain traction. As BBC reported on Wednesday, Covid cases in the UK are decreasing according to the daily figures released by the government, with the number of cases confirmed over the past seven days having fallen 13% compared to the previous week.

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market 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, efficient risk management and tailored solutions to your business’ transfer needs.

 

The pound found support on Tuesday due to a weaker US dollar and improving market sentiment. Fears about the new Omicron Covid variant began to ease and helped to improve the overall market sentiment.

With no negative Brexit-related news, and rising expectations for a rate hike by the Bank of England in December, the pound will remain supported. Apart from this, limited demand for the US dollar will also provide some impetus to the British currency.

Omicron fears ease

News that the Omicron symptoms are mild have helped ease fears regarding the economic effects from the new variant and boosted investor confidence. Equity markets were buoyed but the US dollar’s status as a safe haven was undermined. Expectations that the Fed will proceed to tighten policy and raise interest rates sooner than later has helped to limit losses for the dollar.

Advanced vaccine booster programme

The UK’s advanced vaccine booster programme has also injected markets with hope as analysts believe that the UK’s programme might mean that harsh restrictions might not be necessary. If the UK succeeds with its booster programme and protects the majority of the population, then this could benefit the pound.

As mentioned earlier, markets and the pound will become more positive once more news is announced about the efficiency of vaccines against the Omicron variant. Pfizer is expected to offer some research findings before the weekend.

More particularly, for the pound, what matters is also the government’s response to the number of cases which is currently rising. Markets will watch closely any news from the Prime Minister and how he will deal with the incoming data about the virus and vaccines. There is still much uncertainty about how strong and dangerous Omicron is and how it may be able to infect people despite vaccine protection.

Since the new variant was first detected, global markets have fallen, and the pound posted losses against the dollar and euro as sentiment deteriorated.

Pound at the mercy of external factors

The pound has been at the mercy of global market sentiment and fears about the Omicron variant. Once things improve and it is clear that the variant is not as dangerous, then the pound will gain more support.

The Bank of England is expected to consider raising interest rates on December 16, but the Bank will also take into account the Omicron variant and its effect on the economy.

Prime Minister Boris Johnson said on Monday that over 20 million people have already got their booster jab. Health professionals are worried that the vaccine could escape the protection from vaccines. Omicron now is spreading more quickly than the Delta variant with more cases in London and the South East.

There is a general view that Omicron won’t be a big problem as its symptoms are mild, but experts remain cautious as they fear another wave of hospitalisations. Until more details are made clear about the transmissibility of the Omicron variant, the severity of disease and the effectiveness of vaccines, markets will grapple with uncertainty.

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market 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, efficient risk management and tailored solutions to your business’ transfer needs.

The pound fell on Wednesday despite the UK budget statement, which was in line with expectations. There was no indication that Chancellor of the Exchequer Rishi Sunak’s budget announcement contributed to the market movement. The fall is possibly linked to a drop in the yield of long-duration UK government bonds and shows that markets expect the government to reduce borrowing in the coming years.

2021 Budget

In general, news about today’s budget statement was positive about the economic outlook, regardless of the fact that there was no fiscal stimulus announced. Sunak, said he had asked the Bank of England to remain committed to controlling inflation and keeping it low and stable, as anything above 2.0% will not be favourable in the long term. Next Thursday, with the Bank of England meeting, pound volatility will be expected.  

Rishi Sunak said that his budget delivers a stronger economy, stronger growth, public finances and employment, so that it is possible to begin building the economy post-pandemic. As he noted: “Let there be no doubt: our plan is working.”

Growth

Sunak said overall spending will increase by £150 billion, the "largest increase in a century", as the economy is expected to grow and expand 6% in 2022. The chancellor said that forecasts from the Office for Budget Responsibility (OBR) show the economy will grow by 6.5% this year, 6% next year, 2.1% in 2023, 1.3% in 2024, and 1.6% in 2025. Unemployment is forecast to reach 5.2%, down from a forecast of 12% last year.

Inflation

The chancellor said inflationary pressures are currently impacting on the UK economy and the government will make sure to support households. The Office for Budget Responsibility (OBR) is expecting inflation to be around 4% next year.

Borrowing

Sunak said that will set new “fiscal rules” for public finances. During “normal times” the state should only borrow to invest in growth while balancing everyday spending. In the current financial year 2021-22, borrowing will be 7.9% of GDP, and will fall to 3.3% in 2022.

Employment and skills

The chancellor said the government will raise government spending on skills and training by £3.8bn. The government will create a UK-wide numeracy service called Multiply to help 500,000 adults. This is part of the government’s commitment to improving lifelong learning and productivity. While a lot of this has already been announced, the 43% increase in spending is considerable.

Business taxes

The bank surcharge will be cut from 8% to 3%. Business rates will be changed to help companies and a new 12-month relief will be provided to companies to invest in their premises. The incentives are worth £750m. Sunak said that 2022’s intended increase in the business rates multiplier will be terminated. There will also be a 50% business rate discount for companies in retail, hospitality and leisure. The cut is worth £1.7bn. The chancellor highlighted that “This is the biggest single year tax cut to business rates in over 30 years.”

Taxation and universal credit

Sunak also announced that the taper rate in universal credit will be cut from 63p to 55p. This will be worth more than £2bn. The work allowance will be increased by £500.  In regards to taxes, Sunak confirmed: “By the end of this parliament I want taxes to be going down, not up.”

The reforms to the universal credit system will enable only those in work to keep more of what they own and will encourage employment.

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 pound fell following disappointing retail sales and a drop in the GfK Consumer Confidence survey, but reversed losses after the release of better-than-expected Preliminary PMI data for October.

PMI

The Markit/CIPS Manufacturing PMI for October came at 57.7, higher than the expected 55.8. The Services PMI also came at 58, higher than the 54.5 forecast and September’s reading of 55.4. The Composite PMI came in at 56.8, also above the forecast of 54 and the previous month's 54. IHS Markit’s Chief Business Economist Chris Williamson said that the flash PMI data was higher than the average of 54.0 before the pandemic and showed that the GDP grew each quarter 0.7%.

Markit reported that activity increased as the private sector growth reached a three-month high, with strong business and consumer spending. Service providers were the main driver behind the recovery. Employment numbers also rose as improved customer demand and confidence about the business outlook strengthened. Pressures from higher costs and staff shortages will however persist.

Retail Sales

Earlier on Friday, the ONS reported that UK retail sales fell in September. The pound dropped following the disappointing news, as it was shown that the economic slowdown might be worse than expected. Retail sales for September were down 2.6% year-on-year, lower than the expected 1.7%.

Even as we move into the Christmas period, higher gas prices will keep operating costs high and reduce consumer spending power.

November interest rate hike

The pound will also be at risk from the Bank of England disappointing markets and not proceeding as expected with the interest rate hikes. The markets now see a November interest rate hike (from 0.1% to 0.25%), as a 56% possibility, which is down from 90% earlier this week, after Bank of England governor Andrew Bailey suggested the BoE will have to act to control inflationary pressures.

BoE chief economist Huw Pill told the Financial Times that the Bank would have a "live" decision to make at its next meeting on the 4 November. While he declined to say how he would vote at the Bank’s meeting next month, he said "it is finely balanced": "I think November is live."

The UK interest rate has been at a historic low of 0.1% since March 2020. The view that November’s meeting is “finely balanced” may have encouraged traders to reconsider the odds of action next month.

GfK Consumer Confidence survey

Consumer confidence was also down in October, at its lowest since February. Consumers are concerned with the future of the economy. The possibility of a cold winter coming while dealing with fuel and food shortages, Brexit and surging inflation, as well as interest rates affecting the cost of borrowing, not to mention Covid-19 cases rising, does not sound especially promising. The Petrol Retailers Association (PRA) has said that all-time highs seen in April 2012 of 142p per litre for petrol and 148p for diesel will be surpassed by the end of October. Average prices for petrol and diesel had reached 141.35p and 144.84p respectively on Tuesday, according to Experian Catalist UK.

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.

 

With Bank of England policymakers signalling that the central bank is moving towards an early interest rate hike, traders have been trying to figure out what this means for the pound. Economists and forex analysts have offered both positive and negative comments about the bank’s intention to raise interest rates, with other analysts turning neutral. 

Interest rate rise could hurt the pound

Markets are now expecting the BoE to raise interest rates in November, with further rates to follow by the end of 2022. However, the link between higher interest rates and a stronger currency has been broken, unfortunately, due to the current energy crisis, higher costs and a struggling economy due to the pandemic. Within this environment, many analysts are concerned that an early rate hike will actually create more problems and that it could be reversed within two years, creating further uncertainty for the currency.  

Jane Foley, head of foreign-exchange strategy at Rabobank, said that “There is a lot of uncertainty,” in London. “It’s easy to argue that rates going up will strengthen the pound. But the risk of a policy mistake means the BOE could hike soon but then won’t be able to follow through” with more tightening.

Bank of England Policy Mistake?

Markets are unsure about the outlook for the pound, with institutional fund managers limiting their trades against the pound and others betting for the pound to strengthen. For some analysts, the BoE tightening will provide some support for the currency but, for others, the lack of economic growth will eventually reverse any gains.

Additionally, further challenges remain. Brexit tensions between the UK and the European Union over Northern Ireland could escalate into a trade war, but Prime Minister Boris Johnson has offer assurances that solutions will be delivered within the week.  

Despite the Bank of England’s Governor Andrew Bailey’s reassuring comments that the Bank will do what it takes as inflationary pressures rise, traders are concerned about the pound outlook in the longer term.

Pound remains “insensitive” to UK rate expectations

While many foreign exchange analysts have voiced their concerns about the pound outlook if the Bank of England proceeds to an early set of interest rate rises, HSBC strategists believe the pound is “insensitive to the continued hawkish drift in UK rate expectations.” Even if inflation falls at the end of 2022 and there is no need to raise rates higher on a long-term basis, HSBC says there is more to the pound than an automatic fixation on the BoE.

Indeed, the pound is not driven solely by the desire of the Bank of England to raise or not rates. A they argue, the pound’s performance has been mainly determined by global forces. It rises against the euro and US dollar on positive investor sentiment and falls when global markets struggle. As investors recently digested global concerns about the pandemic and the energy crisis, buying interest for the pound has returned, pushing Sterling higher.

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 pound remains strong and is close to last week’s gains against both the euro and the US dollar following Bank of England Governor Andrew Bailey’s comment that the bank is intent on raising interest rates as inflation risks rise.

Many analysts have noted the benefits of an early rate hike, while others have warned about the impact of an early rate hike on UK growth prospects. According to foreign exchange analysts, the pound has found support from expectations that the Bank of England will be among the first major central banks to raise interest rates since the pandemic started.

Bank of England

Bank of England Governor Andrew Bailey said on Sunday the Bank of England intends to raise interest rates if inflation continues to grow. Speaking to the Group of 30, an international body of financial leaders, Bailey explained that UK inflation will be temporary, but rising energy prices will push it higher and for a longer period of time. Bailey said: "Monetary policy cannot solve supply-side problems - but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations.” He also clearly stated: "We at the Bank of England have signalled, and this is another such signal, that we will have to act. But of course that action comes in our monetary policy meetings."

Some analysts believe that the shift in monetary policy will outweigh the negative effects of slow economic growth and will slowly push the pound higher.

Rabobank: Risks Ahead

The prospect of the pound rising next year and beyond could be hindered by fears around the medium-term outlook for the UK economy. Rabobank said: “Tensions with French fishermen and disagreements about the Northern Ireland protocol have brought warnings of a trade war between the UK and the EU. Neither had had a significant impact on the pound to date. That said, this is a risk that the differences between the UK and the EU won’t be resolved easily and, on the margin, this news-flow provides an additional disincentive to GBP investors.” They added: “We are not expecting the BoE to raise rates in the coming months and see scope for GBP to edge lower on disappointment.”

Next Interest Rate Rise

Money markets are now expecting a rate rise in November, and as many as three rate hikes in 2022. If the Bank disappoints and does not proceed to a rate rise, the pound will fall. At the same time, other analysts have talked of a Bank of England policy mistake as they believe raising interest rates would slow down growth. A more aggressive BoE tightening will push borrowing costs for households and businesses higher and will impact the UK housing market. Stagflation (no growth and high inflation) fears will add to concerns about the pound.

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.

 

Improved market sentiment has helped push the pound higher against the euro and the US dollar. Comments from two of the Bank of England's Monetary Policy Committee (MPC) members Silvana Tenreyro and Catherine Mann, who spoke out against an early rate rise, did not affect the pound.

Pound Rises

The British pound rose despite comments from the Monetary Policy Committee (MPC) member Silvana Tenreyo, who said the current rise in UK inflation is temporary and that it was early to raise interest rates.

In other news, the European Union threatened to retaliate if the UK abandons the Northern Ireland deal. Nevertheless, Sterling rose on improved risk sentiment.

Bank of England

Two of the Bank of England’s monetary policy committee members have said they prefer to wait and see how gas prices and shortages of raw materials will influence inflation before voting for an interest rate hike. Both economists highlighted that economic recovery remained uncertain.

  • Catherine Mann

Catherine Mann, who is a former chief economist at the Organisation for Economic Co-operation and Development and the US bank Citi, said that it was best to wait and see as traders are currently betting on tighter monetary policy in the UK and US. Mann said that market participants were doing the bank’s job because by speculating on what the bank will do have driven the cost of borrowing in financial markets higher, which, as Mann explained, is what a rate rise would do. She noted: “They see that monetary policy normalisation is the direction of travel … and so they are doing their homework and they are starting to price in that direction of travel.”

  • Silvana Tenreyro

Silvana Tenreyro was also against an early rate hike.  Speaking to BusinessLive Wales, she said even a rate rise could be “self-defeating” if inflationary pressures prove to be temporary. Tenreyro said that the current level of inflation was considered against last year’s low prices. Additionally, the surge in the global price of energy and other commodities pushed inflation higher but these are usually temporary. Tenreyro explained: “The prices go up, but they don’t keep going up sustainably, so you have a one-off price effect and in that sense inflation should be transitory. She also said: “By the time interest rates were having a major effect on inflation, the effects of energy prices would already be dropping out of the inflation calculation. If some effects were to prove more persistent, it would be important to balance the risks from a period of above target inflation with the cost of weaker demand.”

Many investors are speculating that the BoE will raise interest rates before the end of the year, becoming the first major central bank to raise rates since the start of the coronavirus pandemic.

 

 

 

Foreign exchange investors are interested to see how central banks will choose to act and when they plan to raise interest rates.

The Pound's rally higher despite dovish comments by Tenreyro, suggest that her views are already known and unsurprising and are not powerful enough to deter the majority of the Bank’s members raising interest rates. Some analysts expect an early rise to boost the pound, while others are arguing that a rate rise might be bad for the pound as it might raise costs at a time that growth is slowing down.

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.

 

Brexit might had gone away for a while, replaced by more prescient concerns such as the pandemic, slower economic growth, supply chain issues and higher inflation, but it is making a comeback. Tensions between the EU and UK over the Northern Ireland agreement could put an end to potential gains, analysts gave argued, while inflation worries could also put more pressure on the currency.

A weaker US dollar and falling US Treasury yields have also helped both the euro and pound rise. Despite higher wages in US inflation data and rate hike expectations, the US dollar fell from Wednesday’s almost one-year high.

Bank of England: First to raise interest rates

The pound was higher yesterday following data that showed the economy grew 0.4% in August, 0.8% smaller than February 2020, the Office for National Statistics said. Economists were expecting a monthly gross domestic product growth of 0.5% for August. The biggest impetus for the pound is the expectation that the BoE will be the first central bank to raise interest rates since the start of the pandemic, with some investors expecting a rise to 0.15% by December.

Sterling was at a two-week high on Monday due to weekend headlines that Bank of England governor Andrew Bailey, and MPC policymaker, Michael Saunders, warned of inflationary risks and the need to act, raising interest rates earlier and preventing inflation from becoming permanently embedded.

Analysts believe that the Bank of England's move towards raising interest rates will push demand for the pound higher. However, other analysts have argued that moving too early might risk economic growth, especially at a time when the growth outlook is subdued.

Brexit

The positive news that Brussels plans to reduce checks on goods entering the region has done little to provide fresh impetus to the pound. The new plan, which seeks to resolve a dispute over a key part of the Brexit agreement, would remove about 80% of spot checks, while customs paperwork would also be cut by 50%.

However, UK Brexit Minister Lord David Frost’s demand to rewrite the Protocol to remove the oversight role of the European Court of Justice (ECJ) might create further tensions.  On Wednesday, a UK government spokesman said both sides should start a new round of "rapidly conducted" talks to tackle such issues as governance, since a solution needs to be found that protects the Good Friday Agreement and strengthens the relation between the EU and UK.

Democratic Unionist Party (DUP) MP Ian Paisley told the BBC that Prime Minister Boris Johnson told him "personally that after agreeing to the protocol he would sign up to changing that protocol and indeed tearing it up, that this was just for the semantics".

Talks between the EU and UK on the new proposals might last for several weeks. Any renewed tensions and disagreements could spark more pound volatility.  

 

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 pound is not expected to rise higher from current levels, analysts have said.  Brexit tensions and an early interest rate hike by the Bank of England could eventually push the pound lower. Barclays warned of possible Brexit tensions rattling the foreign exchange market, while HSBC analysts said that the pound is not cheap and that there are significant risks to the UK outlook.

HSBC analysts

HSBC currency analysts believe that the pound should have been higher than current levels, considering market expectations for an earlier rate hike. The fact that the British currency has failed to advance despite these developments, suggests that political risks are returning to the currency.

HSBC analysts do not see scope for further Sterling gains, as the pound faces opposing forces including growth, inflation, rate expectations and external balances. They argue that the pound’s trajectory will become clear once one of these forces dominates the other. The bank said that Sterling could gain in the near-term due to the Bank’s expected rate increases but this would be offset by a deteriorating economy as the Bank’s monetary tightening fades quickly. The high energy costs combined with higher inflation will slow economic growth, the analysts added.

  • Brexit vote and financial crisis

HSBC noted that the pound has been deeply affected by the Brexit referendum in 2016 and earlier by the 2008/9 financial crisis. Both events have influenced the fair value assessments of the pound and they argue that currently the UK currency is closer to fair value and even expensive against other currencies.

  • Inflation

HSBC bank notes that the UK is expected to grow at a slower pace while exhibiting the highest inflation in over a decade, with fears of stagflation hurting the pound. In a survey conducted by Barclaycard, 90% of the shoppers said they were concerned that rising costs of everyday items would affect their household finances.

Barclays

Barclays analysts are also concerned with the pound outlook as they have pointed out that tensions between the EU and UK over the Northern Ireland protocol could negatively impact on the foreign exchange market. Failure to reach an agreement might result in the UK triggering Article 16 of the protocol, triggering retaliation measures by the EU such as tariffs and impacting on the Trade and Cooperation Agreement (TCA). Any such scenarios will hurt the pound.

Britain wants to negotiate a “new protocol” to regulate post-Brexit trade in Northern Ireland, Britain’s Brexit Minister David Frost said in Lisbon on Tuesday. Ahead of the European Commission's formal response to the UK’s plan, Lord David Frost said the EU would be making a “historic misjudgement” if it refused to rewrite the Brexit deal covering trading arrangements for Northern Ireland. Brussels has warned the UK that they are not in a position to indulge themselves in important renegotiations.

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 pound could rise against the euro due to the Bank of England’s optimistic stance as interest rates are now expected to rise earlier than previously anticipated. The pound was also pushed higher as traders looking for a good offer bought a cheaper pound. According to analysts, the pound could reach new highs by the end of this year.

Bank of England and Rate hike

While last week, the pound fell due to inflationary concerns, over the weekend it was higher. With limited economic data the week ahead, the pound will be likely influenced by more news on the fuel crisis, but analysts expect it to remain supported on BoE’s interest rate prospects. The Office for National Statistics has also upgraded its second quarter GDP growth forecast from 4.8% to 5.4%. With the Monetary Policy Committee of the BoE expected to raise the bank rate to 0.25% in May and one more time in 12 months, markets are optimistic.

In a speech that was given to the Society of Professional Economists annual dinner, the Governor of the Bank of England said: “All of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainably over the medium term. Recent evidence appears to have strengthened that case, but there remain substantial uncertainties and we are monitoring the situation closely. The BoE policymakers would need to see clear evidence that the labour market is thriving and employment activity is back to normal levels before taking any action.

Labour market possible scenarios

The BoE governor in his speech, outlined three potential scenarios for the labour market, highlighting the uncertainties ahead, as each of these could influence growth, inflation and monetary policy in different ways. The first scenario revolves around the furlough scheme and how after the furloughed workers return to their old jobs, we are still left with an excess of job vacancies. If these vacancies are linked with shortages of workers in particular sectors, this could push wages higher. This situation could raise the rate of unemployment consistent with stable wage growth. In a second scenario, where demand rises over time, vacancies and unemployment could fall. In the third possible explanation, advertised vacancies could be higher, but some of these could turn out not to be jobs as employers change their mind or postpone hiring.

Tightening monetary policy and bank rate

Governor Bailey has characteristically said that despite uncertainty, the stimulus program will need to unwind, and this will be coupled with an increase in the bank rate. He said: “For most members of the MPC, the outlook for the labour market – as I described earlier – is highly uncertain and to some degree likely to be resolved in fairly short order, and this justified a wait and see approach on policy in view of the continuing belief that higher inflation will be temporary. Within this view, some members put more emphasis on the continuing shortfall in the level of GDP relative to pre-Covid, while others emphasised the continuing direction of travel towards closing that gap and the evidence of cost pressures accompanying the closing. But all of this group were of the view that the stimulus to monetary policy enacted in response to Covid would need to start to unwind at some point, that unwind should be enacted by an increase in Bank Rate, and if appropriate would not need to wait for the end of the current asset purchase programme.”

This means that the Bank is expected to normalise its policy in early 2022 which could support the pound. Analysts view the pound’s recent weakness as temporary and expect it to strengthen in the long-term.

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.