Further Sterling exchange rate volatility expected in another week packed with economic data releases

Last week saw a turbulent week of trading, with GBP-EUR rates dipping to a 1 month low. The low was however short lived, and Sterling managed to claw back some strength back to 1.1660, as the European Central Bank indicated that Interest Rates have peaked.

The European Central Bank raised interest rates by 25 basis points on Thursday, to 4% – a record high by the European Central Bank (ECB). This was the bank’s 10th raise in a row. This was seen as a doveish hike by markets.

The European Central Bank said that, ‘based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.’

This signifies that policymakers believe interest rates have peaked, decreasing the likelihood of any further rate rises. It added that it expected inflation in the 20-nation bloc to fall to around 2.9% next year and 2.2% in 2025. Their target level is 2%. Interest rates in the UK are currently higher than in the eurozone at 5.25%, but UK inflation is also higher at 6.8%, and the Bank of England is expected to raise rates again this week.

The Bank of England could see its 15th consecutive raise of interest rates on Thursday 21st September. There is currently an 80% chance of this. Economists are expecting a terminal rate of 5.5% in the UK, and so we are closing in on this level, but with inflation still sky high in the UK, this could all change.

The cost of borrowing in the UK has increased to its highest level since the 2008 financial crisis, and so there is still work to be done to get inflation under control in the UK. GBP-EUR did however conclude the week of trading at 1.1620. This was after ING Bank expressed concerns over the UK housing sector, stating that a key issue for the UK moving forward is the housing market: ‘Here, the average rate on the UK mortgage stock is now 3% and expected to rise to 4% into 2024 as more refinancing works through the system.

This will deliver a hit to consumption and to house prices.’ Looking ahead, the average reading of 50 of the most notable Banks and Financial Institutions predict a GBP-EUR rate of 1.1278 in the next 3 months, about a 4 cent drop off, and a 6 month reading of 1.1252.

Last week also saw a sharp fall in GBP-USD rates, with the Pound to Dollar exchange rate falling 0.65% following Thursday’s European Central Bank interest rate decision. GBP-USD finished the week of trading below 1.24, slipping below its 200 day average. It is expected that the Federal Reserve’s Interest Rate decision on Wednesday will see rates held at 5.25-5.5%.

The FED’s goal is to control inflation and maintain full employment. With Consumer Price Index Inflation now at 3.7% for August 2023 and the jobs market showing some early signs of softness, it demonstrates that the FED’s actions have been effective. The markets currently assess the chance of a November hike happening at about 1 in 4.

This Wednesday’s meeting is particularly important as the Federal Reserve will be releasing their dot plot chart. This documents the Federal Reserve members’ individual thoughts of where they expect interest rates to go in the short term, and will be of particular interest to markets. Looking ahead, the average reading of 50 of the most notable Banks and Financial Institutions predict a GBP-USD rate of 1.2622, and a 6 month reading of 1.2679.

Data releases this week for your diary:

WEDNESDAY: GBP CPI Data – The Consumer Price Index – The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive (or bullish) for the GBP, while a low reading is seen as negative (or bearish). Forecast to increase to 7.1% from 6.8%.

WEDNESDAY: US Interest Rate Decision.

THURSDAY: BOE Interest Rate Decision.

THURSDAY: EUR Consumer Confidence measures the level of consumer confidence in economic activity. A high level of consumer confidence stimulates economic expansion while a low level drives to economic downturn. Forecast to drop.

FRIDAY: USD Global Manufacturing data – an important indicator of business conditions and the overall economic condition in the United States. Readings above 50 imply the economy is expanding, making investors understood it as a bullish for the USD, whereas a result below 50 points for an economic contraction, and weighs negatively on the currency. Forecast reading 47.8 drop.

FRIDAY: GBP Retail Sales – Changes in Retail Sales are widely followed as an indicator of consumer spending. Forecast growth 0.5%.