The GBP EUR exchange rate was back above the 1.2000 level again late in the week as inflation figures supported another interest rate hike and Boris Johnson moved to drop all coronavirus restrictions. The Bank of England governor spoke on Wednesday and noted that inflation was not transitory, noting that energy prices will cause upward pressure and secondary effects are being seen in food and clothing. The 5.4% print on Wednesday was the highest UK inflation in almost thirty years.
The GBP to EUR was back above the 1.2000 level and the week ahead sees PMI data and UK public sector borrowing. However, the week is likely to be dominated by the fate of Prime Minister Boris Johnson.
UK Prime Minister could be ousted after Sue Gray inquiry
The week ahead is expected to see the release of the inquiry into the Westminster garden party and that could see calls intensify for Boris Johnson to step down.
Last week saw a Tory party in chaos as one of their own defected to Labour and in-fighting over Johnson’s fate continued. The Prime Minister announced a sweeping end to the Plan B restrictions in the UK with work-from-home guidance and masks being dropped, alongside the NHS app. Cynics may say that Johnson is looking to boost the Tory party’s flagging polls and that may be true, but we have also seen the PCR test dropped and isolation times halved as the coronavirus narrative seems to be falling apart.
Health Secretary Sajid Javid said that he was “sure” that the restrictions will not be needed after the January 26th deadline.
If the UK is seeing an end to the coronavirus, then that will boost the pound sterling further as Europe is locked in other problems with Russia, inflation, and a sluggish German economy. The other issue is that the European Central Bank do not want to move quickly on interest rates and that could make the inflation problem worse in the months ahead.
Attention will turn to the Bank of England once more
The UK Prime Minister will learn his fate this week and the country may be looking at a new leader, but the favourites for the job are Liz Truss and Rishi Sunak, who are unlikely to diverge much from the current PM’s plans.
After the leadership issue is resolved, the attention will turn again to the Bank of England ahead of their next interest rate meeting.
Bank of England Governor Andrew Bailey said on Wednesday that the inflation pressures may linger longer that previously forecast, citing energy costs and signs that wages are seeing upwards pressure.
Bailey said the bank will do “everything” they can to tackle the cost-of-living squeeze, but also said the higher inflation could slow price growth via lower demand and jobs.
“I don’t want to suggest that … were we to consider it necessary, we don’t have to take any action in terms of the Bank of England’s action on interest rates,” he said.
Analysts are expecting another increase to 0.5% from the BoE when they next meet.
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