This week has proven to be rather volatile, with the pound rising and falling unexpectedly. The pound rose against the US dollar, euro and other major currencies on Wednesday, following improved market sentiment, but later in the day began struggling due to the lack of data to offer support. The US dollar rose as equity markets fell, attesting to the gloomy market sentiment due to worries about global economic growth. With oil prices continuing to rise and Central Banks set to raise interest rates, markets are concerned that global growth will stall. 

On Tuesday, the pound was higher due to the better-than-expected S&P services PMI, despite that the data showed that economic growth slowed down, as inflation continued to rise.

Analysts have suggested that the pound’s good performance this week on Tuesday and early Wednesday suggests an unusual demand for the pound, which was not solely driven by the improved market sentiment.

ECB and interest rate hike

The pound is expected to weaken against the euro on Thursday if the ECB indicates a 25-basis points for a rate hike in July while also confirming market expectations for a potential further 75 basis points of rate hikes over the rest of the year. However, this is already priced in by the market and not expected to provide much volatility for the euro.

Market analysts and participants will closely watch for any signals that show the ECB is determined to go further and hike by 50-basis points in its next meetings, which could boost the euro and hurt the pound.

Bank of England and interest rate hike

Attention will fall on the Bank of England next Thursday when it delivers another 25-basis point interest rate hike. Market concerns focus on the issue of stagflation, as inflation continues to rise, and the economy slows down. While many economists feel that the outlook is gloomy and economic growth has weakened, others have noted that such pessimistic expectations are overdone and that the pound will slowly recover.

With stronger wages and consumers spending their savings from the period of the pandemic, economists believe that the economy will survive the cost-of-living crisis. UK households are facing the worst cost-of-living squeeze in more than 30 years, but with the government’s announcement of a £30 billion package for low-income households, the effects of rising costs might be slightly eased. If the government provides further stimulus measures, then the Bank of England might be encouraged to revise higher its gloomy growth forecasts for this year and the next, and thus encouraging more monetary tightening.

Analysts have warned however, that the market’s current interest rate expectations, which have risen again recently, will be disappointed and that the pound might come under pressure. Nonetheless, any additional insight will be gained on the 16th of June when the BoE meets.  

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.