Last week we saw the Bank of England raise interest rates in the United Kingdom for the fourteenth time in a row. This is another attempt in the long-continued commitment the central bank has taken in the effort to reduce inflation. Inflation levels in the UK are well above target currently sat at 7.9%, 2.4% higher than the European Union and 4.93% higher than the United States. The Bank of England are hoping to end this year with inflation levels at 5%. The current interest rate in the UK is 5.25% after the bank of England raised rates by 0.25% once again. The market reacted to this rate hike with a kneejerk sell off causing the GBPEUR rate to drop to 1.1551. The rate hike was seen as dovish by the market after the previous hike of 0.50%. We have seen the rate of Sterling drop 6 times out of the last 7 post rate hike. Over the course of last week, sterling dropped 1c against the Euro and 2c against the Dollar, as the market priced in the expected dovish hike.
Sterling managed to regain the losses almost immediately after the hike, ending the week at 1.2786 against the dollar and 1.1593 against the euro. The decision by the B of E contained 2 votes of 50 basis points, providing some hawkish optimism from the market. As inflation levels remain elevated, the potential for further interest rates by the B of E remain high with the terminal rate now forecasted at 5.65%. The market expects the UK’s interest rates to remain elevated for longer than their other G10 counterpart central banks. The market expects to see two further hikes by the B of E in 2023. Michael Swannell, Economist for Europe at BNP Paribas expects the central bank to start cutting rates in Q2 of 2024 and for the interest rate to end 2024 at 4%.
In the Eurozone, expectations of a period of economic weakness are coming to an end towards the end of the year. Commerzbank Head of FX & Commodity research Ulrich Leuchtmann states that the market expects to see a Federal reserve hike back on the table in the near future alongside potential European Central Bank hawkish turn which could cause a potential challenge for sterling which has been the G10’s best performing currency so far in 2023. The Dollars recent challenges to the pound were dampened at the end of last week after the U.S Nonfarm payroll data report showed a downside. The labour market softening is what the FED will be looking for in evidence that their inflation tackling is working preventing the need for further interest rate hikes. This comes in contract to the expectations of the market and Commerzbank.
As inflation levels remain elevated across the world, the pressure on Sterling is coming thick and fast, can Sterlin remain elevated against the other G10 currencies? This week coming, we have a multitude of events and data releases that can cause volatility. A few to keep an eye out on.
On monday B of E Chief Economist Huw Pill is speaking, his comments could provide the market with an insight into the Bank’s future plans as well as the British Retail consortium’s Retail Sales year on year data. On Friday we have the GDP date releases for Q2, providing a measure of the UK’s economic activity.
