Will the Pound Remain Steady after Surprise Dip in Inflation ?

The pound has been relatively steady today following a surprise dip in the headline Inflation numbers. In welcome news across the country, the number came in at 9.9% higher year on year for August, versus the 10.2% numbers from last month for July. The important point is the number has been trending higher since the beginning of the year so this marks a turning point and could potentially signal a change in policy ahead. Inflation is very influential on interest rates, and interest rate policy by the Bank of England is crucial to the value of the pound.

Rising high inflation is damaging to an economy since as prices rise, it can limit spending by consumers and business, as they become more careful over their expenditure. The knock-on higher interest rates by a central bank can also limit spending and might cause a recession as has been predicted for the UK late this year or early 2023. Unemployment may also rise and there can be a general lack of confidence which is harmful to economic growth and consumer and business activity.

Whilst good news, this small dip in the Inflation figures doesn’t change the outlook hugely so far, the UK is still facing the highest Inflation levels amongst the leading economies in the world. Sterling is much weaker owing to the worries over recession ahead, and the damage being down to the UK economy by this high figure. The pound appears to be taking a bit of a breather this morning as the market digests this news, to decide if it is a genuine turning point, or just a dip before we do see moves higher. Knowing how cautious the Bank of England can be, they might need to see more evidence of a change to become more confident of a turning point.

It appears petrol prices are the main driver of the fall, with many underlying goods still rising. A key factor too will be Liz Truss’ energy bill freeze at £2500, so hopefully we can see Inflation now stabilise, but the market might need further evidence to trigger sharper moves and a real shift in interest policy ahead.

As mentioned, inflation and interest rates are very closely linked. And interest rates and the relative performance of a currency are also very closely linked, so all eyes will be closely on the Bank of England next week to see if they will deliver their expected 0.5% hike, with the potential for any commentary around the outlook having the potential to influence sterling exchange rates.

If you are looking to buy the pound with Euros or US dollars, following say an overseas property sale or investment, you are buying the pound with Euros near some of the best points in 2022 and since June. With the US dollar, the figures are more impressive, with the best points since 2020 and prior to this the 1980s. Sterling is trading very weakly at present, as markets remain fearful over just how the country will tackle the stubbornly high inflation and help stave off a deep recession that could harm economic growth in the future. It is a similar story against all the majors, including the Australian dollar, New Zealand dollar and the Canadian dollar and Swiss Franc.

If you are looking to sell the pound, to buy a foreign currency it has been challenging lately. However, it is worth remembering the pound was lower in recent years over Brexit. On GBPEUR, we were many cents less last year and in previous years with the 2020 lows reaching 1.05, some 10 cents below current levels. For GBPEUR, 2022 has been one of the better recent years, with rates in the mid to high teens, compared to low teens, and below and around 1.10 for much of 2020-2021.

If you are looking to make a currency exchange and would like to discuss some strategy ahead, I am a currency dealer with 13 years experience guiding both private client and corporate clients through the FX markets, providing strategy and guidance to help make an informed decision.

Thank you for reading and I would be very happy to take any questions or comments relating to this article or to discuss your situation in more detail. You can contact me directly on [email protected] or feel free to request a quote, set up an account or set a rate alert via this site.