Will the Bank of England help or hinder sterling exchange rates?
Last night the US federal reserve raised interest rates by 25-basis points against a backdrop of financial instability in the US banking sector. US interest rates are now at the highest since 2007. At the start of the week many had expected the Fed to hold rates at their March meeting. The SVB banking failure caused concern throughout the sector and further interest rate rises could inflict more pain on troubled banks.
Cable (GBPUSD) benefitted following the Fed’s announcement and immediately rose to 7-week highs presenting a great opportunity for dollar buyers. EURUSD also rose to a 7-week high amidst the expectation that there will be no further rate hikes from the Fed. Some commentators are expecting the Fed to start cutting interest rates in the latter half of 2023 which is piling pressure on the dollar.
The Fed’s dovish statement is positive for sterling and future exchange rates against the dollar and other dollar-based currencies; however, a lot will depend on the tone of the Bank of England this afternoon. The BoE have their March meeting and expectations are for interest rates to rise by 25-basis points.
GBPEUR has begun to lose value in the lead up to this meeting and is trading close to 2-week lows as of this morning. This could be a window of opportunity for euro sellers.
If the bank takes a similar dovish tone to the Fed, then we could see further pressure on the pound. UK inflation is still extremely elevated at 10.4% which suggests the banks previous hikes have not yet had the intended impact. Future interest rate rises may be needed in the UK to bring inflation under control and markets will be looking for any suggestion on this from the bank.
Tomorrow morning is packed with significant economic data releases. PMI data from the UK, Eurozone, and US along with UK retail sales and US durable goods orders.
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Sterling under pressure against the euro and dollar – will the pound weaken further?
Sterling under pressure against the euro and dollar – will the pound weaken further?
Sterling exchange rates have once again come under pressure following comments from Fed chairman Jerome Powell and Bank of England member Catherine Mann regarding future interest rate policy.
GBPEUR is trading within range of the 5-month low, which makes now an opportune time for euro sellers. A transfer of €100,000 is buying £3500 more vs the 5-month high for GBPEUR. Cable (GBPUSD) has also clawed back and is very close to the 2-month low. A transfer of £100,000 is buying $6000 less than the 2-month high.
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Several readings of key US economic data have been stronger than expected in recent weeks, the most notable being Non-farm payrolls which came in higher than 500K vs expectations in the 200K range. The strong data has handed the Fed further ammunition to continue raising interest rates.
Powell believes the Fed need to do more to cool down the US economy and reduce inflation and therefore may need to raise interest rates higher than expected. Non-farm payrolls for February is released tomorrow and expectations are for 203K. A higher than expected reading here will likely boost the dollar and weigh on sterling.
Sterling’s position and future prospects have been weakened by comments from the BoE. Catherine Mann said on Tuesday that we should expect further downward pressure for the pound if the markets had not ‘priced in’ the hawkish tone from the Fed and ECB. The ECB are also expected to continue raising rates in the coming months which has supported the euro against the pound.
The next BoE meeting is March 23rd, the pound may come under more pressure if the Bank confirm the end to their current rate hike cycle.