Sterling hits two-month highs – how will today’s ECB decision impact rates?

GBP EUR Advances Despite Better German Trade 

Sterling had one of its most positive sessions of the year against the euro during yesterday’s trading. The pound hit two-month highs against the single currency following positive comments from Chancellor of the Exchequer Jeremy Hunt.

Hunt was in parliament to deliver the UK budget (Government Fiscal Plan) for 2023 and announced that the UK would avoid a recession in 2023. Hunt’s comments will not come as a surprise for many market analysts after a recent stream of positive or less than negative economic data releases in the UK. Notably Manufacturing and services PMI, GDP, and unemployment figures.

It isn’t all positive news for the UK and pound. The OBR (Office for Budget Responsibility) forecast suggest that the UK economy will still shrink by -0.2% in 2023, although the economy will avoid a technical recession. Future negative growth figures could weigh on sterling’s value if the economies of its major counterparts post growth. The last IMF report suggested the UK’s economy would fare the worse in the G7 this year.

Today is another key day for economic data and exchange rates moving forward. In the US we will see the release of jobs data and in Europe the ECB will announce their latest interest rate decision.

For several weeks traders had begun to price in a 50-basis point hike from the ECB to continue their aggressive stance on combatting inflation. However, over the last couple of days it has become apparent that Credit Suisse, the second largest bank in Switzerland and one of the largest banks in Europe could be at financial risk. This has contributed to the downward pressure on the euro with its value also dropping against the dollar. Credit Suisse’s share prices dropped almost 30% yesterday.

The Swiss lender will have huge exposure to other major European banks and a fallout could place significant stress on the European and global economy. Raising rates by 50-basis points could worsen future financial conditions in the Eurozone if the situation deteriorates. A less than 50-basis point hike could put further pressure on the euro.

If you have a currency exchange involving the pound and any major currency and wish to discuss the markets and how fluctuations could impact the cost, please contact me at [email protected].