Monetary policy meetings and interest rate hikes – Will the Pound weaken further this week?

The week ahead will be a major one for the Pound, Euro and US Dollar will all three respective central banks announcing further developments in their battle to reduce inflation back to target levels, through their monetary policy meetings this week. Monetary policy meetings and decisions on interest rates help us to understand the current health of the economy, which is the main influence on a currency’s value and, any adverse movement away from the expectation within the market, may result in volatile movement.

The Pound lost ground last week temporarily last week off the back of weak goods price and economic output data, both underwhelming expectations, but the main contributing factor against the Euro were the hawkish announcements from several European Central Bank members, leading to this week’s meeting. ECB members Joachim Nagel, Gabriel Makhlouf and Boštjan Vasle all agreed last week that the central bank will need to raise interest rates at this meeting, and meetings after that in order to bring inflation back down to the target level of 2%.

The latest reading of inflation was measured at 9.2% in January, down from 10.1% in December, but the reason for such a sudden drop was some member government’s intervention on energy prices, helping reduce such an impact over the winter months. Core inflation within the bloc continues to grow and the President of the ECB, Christine Lagarde, was also assured of upcoming interest rate hikes as the answer in her most recent speech last week. “We have made it clear that ECB interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive, and stay at those levels for as long as necessary,” Lagarde said. The ECB, and Lagarde specifically, have a reputation for being more dovish than other central banks but, if these comments are reflected in this week’s meeting, then we can expect a more bullish and positive approach moving forward.

The Bank of England are expected to have more of a cautious tone as they navigate their best route of bringing inflation back to target levels. The Consumer Price Index readings, in other words inflation levels, have steadily begun to drop over the past few months, from 11.1% in November to 10.5% in January. This will put less pressure on the central bank to raise interest rates largely at this meeting, or act more aggressively with future decisions, as their target is gradually being achieved.

Governor of the BoE, Andrew Bailey, recently discussed the generalised prediction within the market of peak interest rates at 6%, and commented that they were way too high. With the current bank rate sitting at 3.5%, expectation in the market is that the peak will now sit nearer to 4.5% in the months to come. Bailey did also, however, discuss the potential upcoming recession, predicted as the longest recession in 100 years by the Bank itself, and did so in a more positive light: “It has unfortunately got the characteristic of being long, but shallow. I would say that energy prices have come down so that ought to be a positive.

We have lower gas and oil prices and that will help to alleviate that real income shock somewhat. The market interest rate curve has come down, the exchange rate has strengthened a bit which will help a bit in terms of its pass through to inflation. So, there are those contributing factors and we will have to do the analysis over the next couple of weeks (next monetary report) to see what we turn those into.” 2 out of 9 members of the BoE voted for the interest rates to remain unchanged at the last meeting in December, so could we see more members begin to follow suit in fear of a recession on the horizon, or will the Bank’s comments provide support to the Pound instead as inflation continues to drop?

The US dollar has benefitted from the most aggressive policy tightening path in four decades in the US, as well as risk on sentiment within the global economy in 2022, and is now beginning to lose footing against a basket of major currencies in recent weeks. Cable rose 6 cents in January, with Euro also gaining 5 cents against the greenback within that timeframe, as the Federal Reserve head towards their monetary policy meeting on the first day of February. After two 75 and one 50 basis point hikes in recent months, there are speculations within the market of a more modest rate hike to give inflation time to decrease as monetary policy lags behind, and not drive the economy into an unnecessary recession in moving too aggressively.

CPI readings in the US peaked at 9.1% in July and have dropped to 6.5% in the most recent announcement, which displays the effect the quickened pace of interest rate hikes may have had on the market. Jerome Powell, Chair of the Federal Reserve, stood firm on the central bank’s policy for 2023, however, in a speech to kick off the year. “…restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy. The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.”

Will the dollar gain back its recent losses? Can the Euro continue on its more positive start to 2023?

Key dates this week:

Mon – German GDP figures
Tues – German Retail sales & CPI figures, Eurozone GDP
Wed – Eurozone CPI, US Manufacturing PMI & Fed interest rate decision
Thurs – ECB and BoE interest rate decisions
Fri – Nonfarm payrolls US

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What will 2023 Bring For Sterling Exchange Rates?

Sterling exchange rates have dropped on the whole throughout 2022 and it is fair to say there are a number of quite obvious reasons behind the poor performance of the pound over the course of the year.

Here is a summary of GBP paired against a selection of major currencies and the movement since 1st Jan 2022 as an example.

GBP/USD -10.79%

GBP/EUR -4.97%

GBP/CAD -5.44%

GBP/AUD -4.69%

GBP/CHF -9.97%

All in all, the above suggests the pound indeed had a torrid time of it, most notably shortly after Liz Truss became Prime Minister and we saw a mini budget announced from then Chancellor Kwasi Kwarteng which ultimately cost him his job, but also knocked the pound for six, dropping to a 1985 low against the Dollar at one point.

We in fact had three Prime Ministers and four Finance ministers over the year, not a recipe for certainty and stability.

On top of this, the Bank of England have been fairly slow to act on raising interest rates in comparison to other Central Banks around the world, we are still yet to see if this move will pay off now that inflation is expected to start to come down, however what that has done is led to a flow of money out of the pound and into more rewarding currencies, such as the USD where the Federal Reserve have been aggressive in their interest rate hikes, thus making their currency more attractive to investors looking for a great return.

What will 2023 bring?

There is no getting away from the fact that 2023 will be a tough year for many and that the UK will likely be in recession for most if not the whole year, however it is also important to remember that the UK is not alone with this problem.

Equally the same can be said for inflation issues, cost of living, energy prices and the prospect of Covid poking its nose back into daily life more aggressively once again, virtually the whole world has these issues, the key will really be how they are dealt with and who can bounce back the quickest.

I would hope that this year the UK can avoid the political turmoil seen over a number of months in 2022, political certainty is one of the key drivers for the performance of a currency and there is absolutely no doubt the circus act that played out earlier in the year from Boris to Liz to Kwasi with many smaller parts played as well will have done nothing but hurt the pound and I still don’t believe it has truly recovered internationally because of this.

Investors however do seem to feel that Sunak and Hunt are a safer pair of hands, so should they avoid any drama in the coming year this should settle the pound a little and I believe this would give Sterling exchange rates the chance of a better year.

In terms of the economic issues that we are facing I would be a fool to say there won’t be moments throughout 2023 that will cause nerves for investors and speculators when it comes to the Pound.

We clearly will have a squeeze on everything, the person on the street already has less in their pocket and that seems like it may only continue, this will in turn hit retailers and could cause a domino effect on the UK’s economic performance as a whole.

Many may not have felt the interest rate squeeze on their mortgage yet but there will be a lot of renewals coming up in 2023 which could cause further issues for households and house prices as a whole are expected to come down.

Bills on the whole for everyone are going up whether it is heating your home, filling up your car or getting your weekly shop everything is becoming tougher and there are many in the UK that are struggling already, so I feel the first few months of 2023 could continue to be a tough period for sterling exchange rates, as it is unlikely consumers will be flying out of the traps to spend in early 2023 if anything it could be time to batten down the hatches and to get to Spring.

From Spring onwards it wouldn’t surprise me to see people out spending again, if only a little. Heating will be going off, that British attitude of keep calm and carry on will likely play its part and I would hope that 6 months of political stability might start to draw investors back in.

Despite the challenges the UK faces as a whole there is a huge amount going for it. During and after the last big recession in 2008 the UK bounced back considerably well and outpaced all other members of the G7, so it does show that historically the UK can bounce back and bounce back well, so this will all being well give investors confidence to look to the pound, especially whilst it is what could be deemed undervalued and it would not surprise me to start seeing investors position themselves for a Sterling recovery later in the year.

Morgan Stanley recently published that they believe the pound would be in their top ten surprises of 2023 and expect Sterling strength, you can find many other economists arguing the opposite but I tend to agree with Morgan Stanley on this one.

My expectations are of a fairly bleak and challenging winter further pushing the pound only to see a recovery as the year progress, albeit it is really hard to know for sure what is around the corner in the currency markets, this is where I feel things could pan out for the pound in 2023.

Currency exchange to carry out in 2023?

Do you have a large currency exchange to make in 2023, for your business or buying/selling an overseas property?

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Feel free to contact us directly on [email protected] should you wish to find out a little more about how we can help you, or if you would like access to our trading team who can discuss an individual situation you have and to directly tailor or research from multiple analysts on how the market may move for you, so that you can maximise your money.

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I wish you all a Happy New Year and a fantastic 2023.

Pound Sterling rises as Sunak expected to be third Prime Minister in a matter of months

GBP AUD Slumps After UK Cabinet Resignations 

The pound has started off the week on the front foot against all major currencies, following another weekend of political twists and turns for the UK.

As we headed towards the end of an eventful week, news broke that ex Prime Minister Boris Johnson was heading back from a Caribbean holiday to have a crack at  regaining his position at number 10, something that seemed a million miles away only a few weeks ago.

As most readers will know, the UK is full of surprises at the moment and this news gave the pound a slight wobble as further uncertainty was cast over where the UK would head next, and with expectations of a completely broken Conservative Government should Boris get back in, the outlook led to investors and speculators shying away from the already damaged pound.

Fast-forward a few days and we have had a lot of further change, Boris has pulled out, Penny Mordaunt is struggling for numbers and there is every chance that by this evening we will have a new Prime Minister – Rishi Sunak.

Currently he is odds of 1-50 with Skybet, so it appears ever likely we will have a winner by the end of the day, and this has actually given the pound a decent boost over the days trading.

Sterling is the best performing major currency of the day at the time of writing, and it appears that Rishi Sunak is deemed as a safer pair of hands, and someone that can start to guide the U.K out of these seeming murky waters.

What this does bring are further unknowns, what will new PM Sunak have planned, how will he approach the cost of  living crisis, will we have another change to taxes? All of the above present an interesting few weeks ahead again for the pound and how it is seen by investors and speculators alike.

What is for sure, is Sunak cannot afford to have a Kwasi Kwarteng moment, which spooked investors and shot the pound down significantly in a short space of time, his plans need to be thought out, well delivered and to be run past the office for budget responsibility before thrown into the spotlight.

Expectations are that the pound could have an interesting week once again this week, depending on how this all plays out, it is clear that investors seem to back Rishi so a strengthening on the pound over the week could continue once there is clarity he has won the contest, but lets be clear he has one hell of a huge job on his hands, and all eyes will be on his every move and hanging off his every word as to what the plans are both now and in the future.

If you want to be kept up to date with the very latest market movements, or should you have a pending currency exchange to make and you want to discuss your options or to get a comparative quote then feel free to email me on [email protected] and I will be happy to have a chat with you personally.

Pound Sterling Weakness – Why Is The Pound Dropping So Much?

Sterling exchange rates have taken a huge hit over the course of the days trading, as the new chancellor Kwasi Kwateng’s mini-budget appears to have knocked the pound totally out of fashion.

The pound has lost over 350bps against the Dollar sitting in the 1.08 territory, whilst dropping to 1.12 against the Euro and hitting the lowest level against the Swiss Franc since 1974 sitting in the 1.06s.

There is now talk of an intervention and whether HMT will make an attempt late on Sunday night ahead of the Asian markets opening to stabilise the currency, should this not happen or not have the desired effect the Bank of England may need to step in again and look at an emergency interest rate hike less than a week after they raised rates by 50 basis points, which in all honesty wouldn’t look great.

Sterling really is taking some big blows out in the financial markets and it is tough to see how the pound will fight back, the lower Sterling exchange rates go, the more costs will spiral and the bigger the potential problem, so we are stuck in a really tricky situation of late.

I like to monitor the pound against a basket of major currencies and today was the biggest drop I can remember since the referendum, with a loss of over 10% in value against a basket of major currencies.

So where does this leave you if you have a large purchase to make be it personally or for your business overseas? The key in the coming weeks is being agile and ready to act.

We could still see a bounce back should we have an intervention or a rate hike, but you must also exercise caution that if this trend continues and you keep holding on it could be an extremely expensive decision.

If you have foreign currency to exchange back through sale of goods with your business or a personal property sale then you are probably reading this feeling pretty happy as your foreign currency has just become worth a lot more, but do be cautious not to get caught in the vicious circle of waiting and waiting then finding it bounces back and it is too late, this is a common occurrence with people in my experience.

I have been helping people move money around the world for 15 years now, if you would like to discuss the pound’s sudden loss of value or chat about a potential trade you need to carry out then feel free to email me, Daniel Wright on [email protected] and I will be happy to get in touch with you personally.

You can also set rate alerts, follow the markets, request quotes and view graphs/charts here on Pound Sterling Forecast so feel free to take a look around the site and we hope it is helpful.

GBP/EUR continues to trade at annual low with BoE meeting in focus in week

In the early hours of this morning, the Pound to Euro exchange rate hit a fresh annual low of 1.1385, which is the lowest level the pair has traded at in close to 20 months.

The weak start to this week’s trading follows on from a 1.25% drop last week, after Friday’s sell-off pushed the Pound lower off the back of some concerning economic data for the UK.

UK Retail Sales were expected to have dropped by 0.5% in August, but data released on Friday showed a drop of 1.6% month on month. With the cost-of-living crisis a mainstay in the news a drop-off wasn’t a surprise but it was the size of the drop that shocked the currency markets and pushed the Pound lower across the board of major currency pairs.

The Office for National Statistics confirmed that all retail sectors were affected and economic reports such as Friday’s confirm that the economy is likely to slide into a recession.

There are hopes that the newly appointed Prime Ministers’ announcement of a two-year cap on energy prices will help ease the cost-of-living crisis and boost spending but the announcement came this month so moving forward retail sales figures are likely to be followed closely and could impact the Pound’s value as we saw on Friday.

This week both the FED Reserve in the US and the Bank of England here in the UK are expected to hike interest rates. There could be further market movements for the Pound as there is uncertainty regarding how much the Monetary Policy Committee will decide to hike interest rates by.

At the last meeting, the BoE hiked by 0.5% and although it’s likely that they will do the same again, the voting patterns haven’t been unanimous with some favouring a 25-basis point hike and others 75 basis points so this Thursday’s release is certainly worth looking out for.

Should you need assistance with a large currency conversion for the purchase or sale of a property overseas and you would like to discuss these market movements in more detail, please feel free to email me, Joseph Wright on [email protected], and I will be happy to have a chat with you.

You can also request a quote anytime you wish if you would like to compare to your bank or current broker.

Pound Sterling losses continue as cost of living crisis dominates headlines – New Prime Minister to be announced today

Pound to Euro rate continues to fall, making history in the process

Sterling exchange rates have continues to drift to kick start a new trading week, as the cost of living crisis dominates headlines across UK media.

With today being an important day for UK politics as we see the announcement of the winner in the Conservative party leadership contest, and ultimately who will be the new Prime Minister, they will almost instantaneously have to announce how they plan to combat what appears to be an extremely challenging winter for the majority of households and businesses.

It is widely expected that Liz Truss will be announced later today at 12:30 and all eyes from investors and speculators will be on her plans to keep people and certain business’s afloat as we face a difficult winter of rising costs, forced closures of retailers, and people simply having to choose between food on the table or heating the house.

This is still clearly impacting the value of Sterling exchange rates, and many feel that it will continue to impact them in the coming months too.

Capital Economics, a well-known independent economic research business has some fairly negative predictions out there for the pound, with expectations that Sterling will lose roughly 5% on a trade-weighted basis in the coming months. This essentially means they expect weakness against most majors, a 5% drop for GBP/EUR or GBP/USD would see Sterling drop below 1.10 as an example, so although it feels low now, if these predictions come true then there may be much further to fall.

It has to be said that the markets can change very quickly and forecasts can be wrong, so it is key to retain the view that things could change, however economic data in the States and the Eurozone is way outperforming the U.K at present, and the drop off in the pound only adds fuel to the fire.

A lower pound means everything imported costs more, from food to gas prices, the lower it drops the higher inflation rises and the more people are paying for goods and services, I personally am noticing costs for almost everything rising and that will be down to many things, but also a lower pound pushing up fuel, transportation, energy and packaging costs for basically every product on our shelves.

The week ahead

We have the news on the new PM later this morning to kick start the week, and as mentioned previously I believe the plans laid out off the back of that could be key for the pound in the early stages of the week.

For those with an interest in Australian or Canadian Dollars, we have the RBA interest rate decision tonight and the Bank of Canada later this week on Wednesday.

Euro followers will note growth figures on Wednesday and more importantly the European Central Bank interest rate decision on Thursday, where the market expects an aggressive 75 basis points hike in interest rates, any change to this could cause immediate volatility, and the wording used regarding future fiscal policy in the press conference after is also likely to set the tone for how the Euro performs over the rest of the trading week.

Currency exchange to carry out and worried about market movements?

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