The pound recovered after falling to its lowest level in almost two years on Friday. Analysts do not expect the pound to US dollar exchange rate to stage a significant recovery after the Bank of England's grim recession warning on Thursday.

The UK economic outlook has weakened, while global investor sentiment has also deteriorated. Investors have now lowered their expectations for the number of future rate hikes at the BoE which has hurt the British currency.

Global concerns about recession

The global economic outlook is also gloomy as China’s Covid-19 lockdowns, rising inflation and the war in Ukraine are all fuelling recession fears. Mihir Kapadia, CEO of Sun Global Investments, has highlighted fears about supply chains and inflationary pressures, including higher interest rates which are affecting the financial markets. A disruption in supply chains, will hurt companies’ earnings and stocks, while higher inflation, higher interest rates and higher bond yields will undermine asset prices and consequently result in falls in stocks and bonds. As Kapadia noted, “With consumer inflation at an all-time high, along with rising energy prices, the cost-of-living crisis threatens to spill over into a larger recession in Europe and the US.”

Worries about higher interest rates are driving stocks lower, as central banks such as the US Federal Reserve are determined to fight inflation by tightening policy, which has added more pressure on markets.

Markets are also concerned due to the current geopolitical risks as Russian President Vladimir Putin celebrates the Soviet victory against the Nazis in the Second World War. Russia’s display of military strength has created concerns as the threat of nuclear conflict looms in the air.

BoE interest rate expectations

After hiking the policy rate by 25 basis points (bps) to 1%, the BoE noted that the UK economy could go into recession in 2022 with inflation rising above 10% as energy prices continue to rise.

The BoE’s gloomy outlook suggests that the policy divergence between the Fed will possibly widen further, as the Fed will hike its policy rate by 50 bps in the next couple of policy meetings.

Analysts expect further weakness for the pound, but they have noted that the British currency has been oversold and it might get a respite as it recovers for a few days. The slowing economy and the rising cost of living will not provide any support to Sterling though, analysts fear.

The Bank of England warned the UK economy would risk a prolonged recession over coming months if it continued raising interest rates to meet the market's current expectations. The market expects the Bank Rate to go to 2.5% by 2023, but the BoE warned that such a move will result in negative economic growth in 2022 and 2023. Following Thursday’s BoE meeting, the market has now been forced to lower its expectations and this have weighed on Sterling.

With inflation rising in the UK, economists explained that the extent of the economic slowdown will depend on households starting to spend their savings, and the strength of nominal wage growth.

The war in Ukraine continues and global market sentiment will remain weak, as energy and commodity costs rise driving inflation higher. The Fed’s determination to hike rates will also weigh on global growth, while China’s zero-covid approach with strict lockdowns will hurt its economy and global growth, sparking further concerns. All these worries are also pushing the pound lower.

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 fell 2% against the US dollar yesterday after the Bank of England raised interest rates up to 1% but painted a gloomy economic outlook warning about a possible recession at the end of the year.  The pound sustained significant losses against the euro and the US dollar but is trying to recover ahead of the weekend.

The Bank of England’s economic forecasts published in its Monetary Policy Report shocked markets with their cautious and pessimistic tone and analysts said that the pound will remain weak for some time.  Derek Halpenny, Head of Research for Global Markets EMEA at MUFG said that the outlook for the pound will be as “grim” as the GDP forecasts delivered by the BoE yesterday.

The BoE might not be the only bank that strikes a cautious tone and warns about the gloomy economic outlook, as other developed market economies face similar inflationary and growth challenges, and their central banks will also have to slow down their rate hike expectations in the coming weeks. If this does happen, the pound could begin to strengthen.

No more rate hikes?

The BoE has definitely surprised markets with some members of the Monetary Policy Committee supporting a 25bp hike but not referring to further rate hikes, suggesting that the MPC is near the end of its hiking cycle.

The BoE's growth forecasts with the 2023 GDP growth forecast being slashed by 150bp to -0.25% was perhaps the most surprising, as the MPC expects the economy to contract in 2023.

As we previously noted, the pound’s shock is linked to a difference of opinion and expectations between the Bank of England and markets. The market was pricing 8-9 more rate hikes from the BoE in the next year or so and more than 25bp hikes in the next two meetings.

Markets expect too many rate hikes, analysts warn

While the Bank said more rate hikes are possible, these won’t be as many as the market is expecting and Sterling will continue to be under pressure.

Some analysts have said that the MPC may hike one more time in the current cycle by 25bp, while others noted that it could keep rates unchanged to avoid a recession, with the risk of inflation reaching extremely high levels.

Bank of America expects three more 25bp hikes in June, August and November, while Investec’s rate expectations have been lowered to 12bps to 2-2.25%. NatWest Markets believes there will be a 25bp Bank rate hike to 1.25%, in August, followed by a pause as the MPC assesses the risks from higher energy prices and the cost-of-living crisis.  

The pound will remain under pressure at least in the near-term as higher inflation risks and a waning rate hike cycle keep market sentiment weak. However, once other central banks begin expressing similar concerns as the BoE, then the pound is expected to start recovering, perhaps in a few months.

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 Bank of England is expected to raise interest rates to the highest level since the 2008 financial crisis, despite concerns about an economic slowdown and the cost-of-living crisis.  

The Old Lady of Threadneedle Street will likely raise interest rates by at least 25 basis points (bps) as already noted in the last meeting.

Base rate to increase to 1%

Markets widely expect the Bank to increase its base rate to 1% on Thursday, raising borrowing costs to the level set in February 2009. Households are under pressure from soaring living costs due to higher petrol prices and rising gas and electricity costs exacerbated by the war in Ukraine. Consumer prices could even reach 10% later this year, which is five times the Bank’s inflation target of 2%.

High inflation

High inflation is a global concern with central banks around the world raising rates to tackle inflationary pressures. On Wednesday the US Federal Reserve raised its benchmark interest rate by 0.5% to a target rate range of between 0.75% and 1%.

Bank of England’s 4th rate rise in a row

Analysts expect the BoE’s Monetary Policy Committee (MPC) to vote for a fourth consecutive rate rise since December when it raised borrowing costs for the first time following the Covid pandemic. By increasing the rates to 1%, the Bank could begin selling some of its £875bn portfolio of government bonds which it created via its quantitative easing stimulus programme since the 2008 financial crisis.

The Bank is not expected to take immediate action but announce preparations for future asset sales, due to high volatility in the markets.

Analysts expect some of the members of the MPC to push for a 0.5% rate rise to show their determination to stop inflationary pressures from becoming entrenched, but a quarter-point rise remains the most likely outcome.

Recession concerns

There are concerns that persistently high inflation could lead to a recession if the increasing cost of living, higher taxes and borrowing costs damage UK consumer spending.

Recently, weak economic data disappointed markets and raised fears after the decline in March of retail sales and lower consumer confidence in April.

Kallum Pickering, a senior economist at Berenberg, warned that weak consumer confidence and evidence of diminished household demand is risky when raising interest rates. As he stated, “If we are unlucky, the UK is already in the early stage of a recession.”

How will the pound react?

The MPC voted 8-1 in favour of a 25 bps rise in March, with one person voting against. The pound could fall today, if there is any sign of widening disagreement among the MPC members to keep the interest rate unchanged, as it would mean that the rate hike cycle is close to a pause. 

If the BoE delivers a hawkish outcome, then this will be a positive development that will push the pound higher and offer support.  However, a cautious policy tightening outlook will hurt 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 is expected to stabilise ahead of the Bank of England (BoE) meeting on Thursday and fall after the announcement, especially against the US dollar, analysts have said.

Economists at ING noted that the BoE might disappoint market expectations on Thursday and said that the next few days will see investors being cautious and waiting to see what the Bank of England will decide. They said: “We think that would prompt a bit more dovish repricing across the GBP curve and the pound could moderately weaken after the rate announcement. Such weakness should prove more pronounced against the dollar, which could find some more support from the FOMC meeting.”

As others have warned, the pound will need to take a considerable “'hawkish' surprise from the Bank of England for it to avoid succumbing to the implications of any gloomier set of BoE economic forecasts this Thursday.”

While, for example, the pound has risen against the euro, this was mostly the result of a weaker euro as markets were concerned about the gas supply and economic risks from China’s lockdowns. But the pound remains at risk from the BoE’s updated economic outlook and inflation forecasts which could disappoint market expectations.

BoE interest rate expectations

The market’s rate expectations are too optimistic, and this could push the Monetary Policy Committee (MPC) to revise down its main projection for GDP growth, Samuel Tombs, chief UK economist at Pantheon Macroeconomics said. He indicated that is “extremely unlikely” that the MPC’s forecasts or comments will confirm the markets’ interest rate expectations. While the BoE is expected to raise the Bank Rate to 1% on Thursday, it might not continue its hiking cycle as it has warned that the cost-of-living crisis will reduce inflation over the coming years, and that interest rates may not need to rise as far as markets expect later in 2022.

The Governor Andrew Bailey has already said last month that the Bank will have to carefully decide how much more it should raise interest rates to curb inflation as it will need to consider the effects of the real income shock and a potential recession. The recent weak data such as March’s retail sales has shown that the squeeze on incomes has hit consumer spending. This is why the squeeze on incomes can be seen as a substitute for some interest rate rises, which could push the pound lower.

What to watch this Thursday at the BoE meeting?

The pound’s performance will depend on the BoE's decision about interest rates this week, the potential consequences of its updated economic forecasts and the language used in the statement and the accompanying quarterly Monetary Policy Report.

Economists have also highlighted that slowing down its hiking cycle does not necessarily mean is something bad for the pound and that many other central banks face similar concerns. However, the Bank’s task of tackling inflation while supporting growth might have negative effects.

A lot of economists have lowered their pound forecasts, as they expect the BoE to push back against market expectations for this year, which inevitably will also push the pound lower.

 

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.