The pound rose after the release of better-than-expected retail sales for April.  UK retail sales volumes rose by 1.4% in April after falling 1.2% in March. The result is higher than the -0.2% the market was expecting. While rising inflation might not have destroyed consumer spending, economists are warning that the BoE will need to act immediately to curb inflationary pressures.

Retail sales

Food store sales volumes rose 2.8%, as consumers spent more on alcohol and tobacco in supermarkets. Alcohol and tobacco sales volumes jumped 8.4% in April, suggesting that consumers spent more time visiting the off-licence instead of the pub. Clothes sales also rose as the summer holidays and weddings are approaching. Fuel sales rose 1.4% after they fell 4.2% in March following higher petrol prices.

The wider picture is however disappointing as over the last three months, sales volumes fell by 0.3% when compared with the previous quarter. As ONS deputy director for surveys and economic indicators Heather Bovill said: “Retail sales picked up in April after last month’s fall. However, these figures still show a continued longer-term downward trend.”

Some analysts are optimistic and have noted that the report shows that the cost-of-living crisis hasn’t destroyed consumer spending. While things may get worse as inflation rises further, economic activity remains resilient.

Rising inflation: BoE chief economist’s warning

Huw Pill has warned that monetary policy needs to be tightened to stop inflation getting out of hand. In a speech to the Association of Chartered Certified Accountants in Wales, Pill said that the central bank has to deal with soaring inflation which threatens to become embedded in domestic price setting and slowdown growth by squeezing household incomes. Pill said that “the balance of risk is tilted towards inflation proving stronger and more persistent than anticipated in that baseline.”

In response to Pill’s warning, Samuel Gee, director at Bristol-based Manning Gee Investments, said that rates will continue to rise, but the economy will cope with more gradual increases, as the Fed’s more aggressive hiking plan has already countered concerns. In the UK, with an economy recovering from the pandemic and a war in Europe, there are many difficulties and risks.

Allan Monks, economist at JPMorgan, said that Pill’s concerns reveal that the MPC is perhaps “leaning towards a more hawkish interpretation” of the bank’s recent guidance.

Another warning came from former Bank of England governor Mervyn King who said that British people should expect a "very unpleasant period", with "considerable" interest rate hikes.

Lord King attacked central banks including the Bank of England and said they should take responsibility for the cost of living crisis which has pushed inflation higher. He said they would have to raise interest rates immediately: "It takes tough action. And it's not a pleasant period through which we're going to have to go."

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.

Growth concerns and recession worries have hit markets and the pound is expected to be weighed down if global investor sentiment remains gloomy. Late on Thursday, it recovered much of Wednesday’s decline, benefitting from a weaker US dollar.

Stock markets fall

Following the warnings of rising costs from US retailers Target and Walmart this week, market confidence was hit. While early this week the pound rose, a change in sentiment midweek has pushed it lower. The FTSE 100 which has a positive relationship to the pound, was down 2.2% on Thursday, with consumer goods and services firms, energy companies, banks and industrial stocks being some of the worst-performing sectors.

Royal Mail was leading the selloff, which fell over 10%, after warning about rising inflation and slowing growth. Investment group 3i (-8.3%), distribution firm Bunzl (-5.6%) and technology investor Scottish Mortgage (-5%) were also lower. Kingfisher (-4.8%), Tesco (-4.8%), and Unilever (-4.7%) fell too, as concerns about consumer spending being hit due to rising inflation rose.

As AJ Bell investment director Russ Mould said, “After the Walmart wobble on Tuesday, Target struck terror into the hearts of the US retail sector and was a big contributing factor behind the worst day for US markets since 2020 on Wednesday. The extent of the impact of inflation on these giants of American retailing has woken investors up, once again, to the huge impact surging prices are having on every facet of the economy.” This along with potential aggressive rate hikes from the Fed and stagflation concerns, have hurt investor sentiment.

UK manufacturing confidence falls

In the UK, confidence among UK manufacturers has fallen, despite UK manufacturing output growing at its fastest pace in ten months over the three months to May. According to the CBI’s latest Industrial Trends survey, confidence dropped in the last quarter, with investment plans for buildings and machinery plummeting. Many firms are also planning to raise their prices which will add more pressure to the households already struggling with higher costs.

Global concerns about rising inflation

In the near-term, the pound could respond to changes in global market sentiment. If the current stock market selloff continues, then Sterling will underperform, especially against the US dollar.

At the moment, investors are concerned about rising inflation and a possible recession in global economies, including the US, UK and the Eurozone.

Analysts have noted that any potential gains for the pound or stock markets will be temporary. A key concern for markets is the expected tightening of monetary policy in the US, with 50 basis point hikes expected at the next three policy meetings. This means that the cost of borrowing will not only rise in the US but also across other global economies.

The shocks from the war in Ukraine as well as the Covid lockdowns in China have also sparked global concerns about an economic slowdown.

Once markets start recovering and sentiment strengthens, then the pound may start to recover too. Morgan Stanley expects the current risk-off phase to come to an end around the third quarter of 2022, since by that time rate hike expectations will have reached their zenith alongside inflation. But analysts at Barclays said that positive global conditions could take up to a year to return. Others are more positive, as they believe economic data remains strong and consumer demand will not be destroyed.

What’s coming up

Any comments around the BoE monetary policy tightening will be a key driver for Sterling for the rest of the week, while April retail sales data due out on Friday, will also provide direction. The March report was the main cause of the mid-April drop in GBP/USD, as it highlighted the cost-of-living squeeze. If the retail sales report disappoints, and risk appetite remains weak in the coming days, then the pound to US dollar exchange rate could fall.

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.

 

 

UK inflation for April soared but came below market expectations, pushing the pound lower. UK headline CPI inflation rate printed at 9.0% year-on-year, which is below the 9.1% the market was expecting, but up from March’s 7.0% reading.

UK inflation is now at its highest level for more than 40 years due to the rising costs of gas and electricity which have pushed household energy bills higher after the rise of the Ofgem price cap in April. The next lift to energy prices will come in October when UK inflation is expected to reach close to 10%, according to the Bank of England.

UK inflation data

CPI inflation rose 2.5% month-on-month in April said the Office for National Statistics (ONS), higher 1.1% previously, but lower than the 2.6% the market was expecting. Core CPI rose 6.2%, but this was in line with the market's expectations. Month-on-month core rose 0.7% which was below expectations for 0.8%. The data is not a big surprise and won't alter market expectations for future Bank of England rate hikes.

Higher consumer prices

The rising cost of food and transport has pushed prices up, worsening the cost-of-living crisis. Not only households have faced the burden of rising costs but also businesses which are suffering from higher energy and fuel costs.

The ONS said the 54% increase in the energy price cap in April was the main reason the consumer prices index rose to 9%. Average petrol prices rose to 161.8p a litre in April with the average cost of diesel at the pumps hitting 176.1p a litre.

Prices at restaurants and hotels rose after the end of a temporary VAT cut for the hospitality industry.

The pound has weakened since last month adding more pressure on businesses as the cost of imports rose. Businesses are also experiencing a shortage of skilled workers, which combined with higher prices, could push the economy into recession, economists have warned.

The British Chambers of Commerce has called for the Chancellor Rishi Sunak to hold an emergency mini-budget, as inflation is damaging consumer spending and business investment, and the UK could enter a recession by the third quarter of the year.

The Chancellor has said he may support those on the lowest pay but the cabinet is divided over how to fund the billions of pounds that are said to be needed in extra subsidies or welfare payments, with some members being in support of a windfall tax on oil and gas companies.

Bank of England

The 9.0% rise in April’s consumer prices is in line with the BoE’s latest estimate and is not expected to change the Bank’s near-term guidance, as two more 25bp rate hikes this year are still priced in by markets. Bank of England policymakers will provide their feedback to the numbers at their meeting in June and markets expect a rate rise for the fourth time since last December to 1.25%.

However, economists are not sure how much further the Bank will go to raise interest rates, with some saying that it will raise rates twice before pausing.

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 struggled on Monday morning amid renewed risks as market sentiment has deteriorated and Brexit fears concerning the Northern Ireland Protocol (NIP) have returned.

Brexit

The UK Prime Minister (PM) Boris Johnson is preparing for changes in the NIP in order to come to an agreement with the European Union (EU). The UK government will reveal plans for changes in the NIP on Tuesday, but the EU has warned that any such actions will result in the potential cancellation of a trade deal with Britain.

Despite Brexit concerns, an article in the Financial Times (FT) has said that British manufacturers are optimistic as they attempt to ease supply chain concerns. According to a survey by Make UK, the manufacturers’ trade group: “Three-quarters of companies have increased the number of their British suppliers in the past two years.

Nonetheless, the current risk-off mood and gloomy market sentiment about Brexit will weigh on the pound to US dollar exchange rate.

Treasury Committee to question BoE senior figures

On Monday, the Monetary Policy Report hearing in parliament could confirm traders’ concerns about how their expectations for Bank of England interest rates might need to be readjusted and could create further disappointment. The Committee is likely to discuss whether the BoE’s recent decision to increase interest rates has weakened the economic outlook for the UK, as well as increases in the cost of living. The weakened consumer outlook and real income squeeze will make it difficult for the Bank of England to deliver anything close to what markets are currently expecting.

Economic data to move the pound this week

While parliamentary testimonies from BoE policymakers this afternoon will influence Sterling, key economic releases coming out this week including the latest employment numbers on Tuesday and April’s inflation data on Wednesday will have an impact too.

On Tuesday, jobs figures are expected to demonstrate a tight labour market and possibly some marginal acceleration in wage growth.

On Wednesday, the April inflation report should also show an increase in the headline rate above the 9.0% mark (2.5%+ month-on-month reading) while the core rate is forecast to rise above 6.0%. Analysts expect these numbers not to have a major impact on monetary policy since the Bank of England has already included double-digit inflation later this year in its latest forecasts.

Wednesday’s inflation number will be the most important release and it could cause some volatility considering the Bank of England’s recent cautious tone and warning against the number of interest rates expected by markets. Even if there is a pleasant surprise this Wednesday, analysts have warned that with the BoE having pushed back quite aggressively against market expectations, the pound will find it difficult to get a boost.

 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 recovered against the US dollar and is higher against the euro. The recovery is due to a weakness in the US dollar, after a positive shift in risk sentiment, with news of Shanghai reopening, which have weakened the safe-haven US dollar. Analysts have noted that any further boost to the GBP/USD might be unlikely, as US Treasury yields continue to rise.

Additionally, the difference between the Fed and BoE’s monetary policy will possibly keep the pound under pressure, at least in the near term.

In the coming week, traders will turn their focus on UK inflation data, while headlines regarding market sentiment and Brexit will also provide direction.

Gas supplies to Europe

The euro has fallen against the pound and the US dollar as rising gas prices could push the Eurozone economy into recession later in 2022 and deter the European Central Bank from raising interest rates. The currency market is expecting less interest rates now as stagflation fears have risen. Russia’s squeeze in gas supplies to Europe and a surge in European gas prices have added to concerns. Natural gas prices surged in Europe on Thursday after it was revealed that Russia was sanctioning energy companies. Russia listed 31 companies which are banned from conducting transactions and entering Russian ports. Gas transit to Europe via Ukraine has also been restricted.

The gas supply disruptions through Ukraine and then to Germany have pushed growth expectations lower.

With lower rate hike expectations, the euro has weakened and any boost it may get from a more positive ECB rhetoric could be short-lived. The pound rose as a result of the euro’s weakness.  

The realisation that inflation could lead to recession, and the fall of the euro follows the Bank of England’s recession warning and the fall of the pound last week.

Eurozone recession risks

Concerns about the Eurozone economy have been voiced by various CEOs who fear the worst. Bosch CEO Stefan Hartung said: “For sure, we see a big recession in the making, but that’s exactly what we see — it’s in the making. There is still an overhanging demand because of the Covid crisis we just are about to leave. It’s still there and you see it heavily hitting us in China, but you see that in a lot of areas in the world, the demand of consumers has already even been increased in some areas.”

Eurozone investor morale has dropped in Europe to its lowest level since June 2020 following the war in Ukraine. According to the latest Sentix index of investor confidence, the index fell to a near two-year low in May (-22.6). Investors were pessimistic about the current economic situation, and the economic outlook with recession becoming visible in the euro area.

Further euro weakness

Analysts warn that the euro could fall further if Russia restricts gas supplies which is something that is increasingly possible as the Russian army has failed to make any progress in eastern Ukraine.

This could lead Russia to attack the West by limiting European gas supplies which could affect Eurozone economy and the growth outlook, while hurting market sentiment towards the euro. The war in Ukraine has tied the euro to energy supplies. For most economists, the possibility of a recession in the Eurozone has risen and the euro will be sensitive to news and developments concerning the region’s growth and potential risks.

 

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 continued to trade within a stable range despite growing concerns about Brexit and the UK economic outlook.

Brexit

The Northern Ireland protocol row has returned with the UK threatening laws to disapply parts of the deal and the EU threatening to revoke the trade deal with the UK. The current threats come at the time where negotiations with the EU over the protocol are about to restart.

Late on Tuesday, the UK foreign secretary, Liz Truss, issued a lengthy tirade against the EU criticising proposals it made last October about checks on goods leaving Great Britain and entering Northern Ireland. She said the EU’s proposals will make current trading arrangements worse and lead to consumer products disappearing from shelves, while adding more pressure on businesses.

As she said, the UK “will not shy away from taking action to stabilise the situation in Northern Ireland if solutions cannot be found.”

The UK is expected to reveal legislation next week to disapply some of the protocol. The EU Brexit chief Maroš Šefčovič, issued a statement on Tuesday warning that a renegotiation of the protocol was not an option as it was a “cornerstone” of the wider withdrawal agreement. If the UK proceeds to disapply the protocol completely, the EU has promised to take action including limited sanctions on British goods such as Scottish salmon and whisky or suspension of the entire trade and cooperation deal.

Recession risk

Last week the Bank of England forecast Britain’s economy would shrink and enter a recession in 2023. Now, there is a more dire warning from the UK’s National Institute of Economic and Social Research (NIESR) institute, which has forecast that gross domestic product will fall by 0.2% in the third quarter and 0.4% in the last three months of the year, marking two consecutive quarters of contraction. “Times are difficult for the UK economy,” said NIESR’s deputy director for macroeconomics, Stephen Millard.

EY Item Club has also forecast that the UK is under threat from a potential recession. They said that UK GDP is expected to grow 4.1% in 2022, 1.9% in 2023 and 2.2% in 2024, but there is significant risk of recession with households set to experience the biggest fall in real wages since 1977.

While the EY ITEM Club’s forecast does not see the UK economy entering a recession, it has warned that there is a potential that this could happen later in 2022 if consumer spending does not meet expectations, or if October’s energy price cap review results in higher bills. Consumer spending is expected to rise 4.9% in 2022, down from the 5.1% and 5.6% expected in March and February.

While consumer spending may benefit from households spending the almost-£180bn worth of savings (8% of GDP) built up during the pandemic, there is a significant risk that consumers may cut spending as their finances come under pressure. With the rising cost of living expected to affect households at various degrees, it is hard to see how the more vulnerable households will manage with the rising costs of energy bills and higher inflation.

The risk of a recession along with the negative Brexit-related headlines, will add pressure on the British pound and limit any gains for the GBP/USD pair.

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.

 

Markets are currently on edge as fears grow that the world economy is slowing, at a time when Central Banks are determined to raise interest rates and unwind their stimulus packages. In this article, we will look at the current economic risks that the UK and the US are facing and how these could affect the British currency.

Risks that the British economy is facing

Britain’s recovery from the Covid-19 pandemic is at risk as price pressures have increased while business confidence has weakened following Russia’s invasion of Ukraine.

Business expectations are now at their lowest for almost one and a half years which indicates there will be a significant slowing in the pace of economic growth in the coming months.

Price pressures have surged due to growing energy and commodity prices after the Russian invasion. Escalating inflationary pressures and concerns related to Russia’s invasion of Ukraine have hurt business optimism and consumer spending. They have also made the situation very difficult for the Bank of England which will have to walk a tight line between protecting struggling households and avoiding recession while taming rising inflation.

Recession fears and business investment opportunities

Following the Bank of England’s latest recession warning, the risk of a possible recession is building, according to new forecasts by leading UK economic forecasting group EY Item Club.

The new EY ITEM Club Spring Forecast has pointed out that inflation, geopolitical uncertainty, skills challenges and increasing supply chain issues are continuing to add pressure on the outlook for business investment.

The EY ITEM Club expects UK growth to drop, with UK GDP to grow 4.1% in 2022 before growing 1.9% in 2023 and 2.2% in 2024. Growth is now depending on struggling households and whether they choose to start spending by saving less and borrowing more. The EY ITEM Club said that the possibility they may choose not to spend raises the risk of recession.

Martin Beck, chief economic advisor to the EY ITEM Club, explained that consumers “faced with a sustained squeeze on their finances, may cut spending in response.” Also, not all households are the same, and some are more vulnerable than others.  Lower income households, for example, will be affected by higher energy bills while any benefits increases will be outpaced by inflation this year.

Hywel Ball, EY UK Chair, highlighted the risks for businesses but said bigger companies might be able to thrive as they have cash holdings and have recovered from the pandemic. She said: “Uncertainty about the pandemic has been replaced by geopolitical uncertainty, which has also had consequences for the cost of capital goods and supply chain frictions. The temporary super-deduction tax incentive should support an investment pick-up this year, but its impact is being countered by strong headwinds. Some businesses also appear to be grappling with labour shortages and aren’t always able to access the talent needed to identify or deliver investment opportunities. At the same time, many large businesses are actually well-placed to invest, having paid down bank debt during the pandemic and built cash holdings which could can be used to fund new projects.”

Risks the US economy is facing

The main risks to the US economy are rising inflation, volatility in stock and commodity markets and the war in Ukraine. The Federal Reserve reported on Monday in a biannual update on financial stability that these risks could lead to a "sudden" disruption. The US financial system is already under pressure as treasury yields continue to rise and oil markets are in trouble, with the risk of a significant deterioration to be higher than normal.

Fed Governor and vice chair-designate Lael Brainard said in a statement accompanying the report that “households and businesses have decreased their borrowing as a percentage of gross domestic product, and currently appear to have resources to cover debt burdens, which is an important aspect of resilience in an environment of rising interest rates."

Indeed, there have been many changes recently including a more hawkish Fed that is determined to tighten monetary policy faster, rising interest rates and inflation that could become more persistent. As with other big economies, the US economy has been struggling with higher and more persistent inflation before the invasion of Ukraine, but uncertainty over the inflation outlook threatens financial conditions and economic activity.

Threats from the Covid-19 pandemic have now receded, only to be replaced by geopolitical uncertainty following the Russian invasion of Ukraine. Higher inflation could affect economic activity, asset prices, credit quality, and financial conditions more generally, the Fed report warned.

As the report said, "the effect of high inflation, rising interest rates, supply chain disruptions, and the ongoing geopolitical conflict on corporate profitability is uncertain. A significant decline in corporate profitability or an unexpectedly large increase in interest rates could curtail the ability of some firms to service their debt." In addition, hard-hit industries such as airlines could find it difficult to recover due to the rising cost of oil.

Both in the UK and the US, higher inflation exacerbated by the war in Ukraine and heightened uncertainty have created significant risks to the economy. Business sentiment is weak while consumer spending is increasingly squeezed. The gloomy economic sentiment will continue to put more pressure on risk-sensitive currencies such as the pound. As it was seen last week, following the BoE’s dovish meeting, the pound fell, with concerns about the outlook for the UK economy and a high risk of recession to continue to build.

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 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.