Sterling on the front foot following UK inflation data

Sterling on the front foot following UK inflation data

Sterling is back on the front foot against the euro and dollar following yesterdays release of inflation data. The pound is trading within 0.5% of the 11-month for GBPEUR making it an opportune time for euro buyers. Cable rates (GBPUSD) have risen from the 6-week low seen on Monday and pairing is trading comfortably above the 1.27 handle at the time of writing.

Yesterday’s data confirmed core inflation remains sticky coming out at 6.9% vs expectations of 6.8%. Core inflation excludes volatile products such as food and energy and is seen as the more important reading when the Bank of England considers the impact of rising prices.

UK interest rates currently sit at 5.25% and have been rising since December 2021 when they sat at 0.1%. Sticky core inflation suggests that they will have to continue rising for the time being to bring inflation close to the BoE’s target level of 2%.

The future interest rate expectations are buoying the pounds value at the moment; however, the economy could be squeezed if interest rates stay higher for longer in the UK.

Household disposable income is likely to reduce as mortgage holders re-mortgage and rent prices rise as landlords re-mortgage at higher rates and pass on the cost increases to their tenants.

Retail sales data released tomorrow will be a key reading for the BoE and sterling exchange rates. A sharp drop-off in sales could signal that interest rates are having a negative effect on the economy and could concern the Bank. A positive reading could fuel sterling further.

Please reach out to us below for market analysis on your upcoming exchange.

Will the Bank of England help or hinder pound sterling?

Today’s Bank of England interest rate decision could help or hinder pound sterling’s future value. It is almost certain that the Bank will raise interest rates for the 14th consecutive time at today’s meeting. A pause in rates would cause shock to the market and likely trigger wide-scale sell-off of the pound.

Current expectations are for a 25-basis point hike. However, there is a chance that the Bank opt for 50-basis points. This would mean back-to-back 50 basis point hikes causing a 1% raise in interest rates in less than 2 months. Sterling would likely rise against its major counterparts in this event.

Currently, GBPEUR sits within range of the 11-month high. Cable (GBPUSD) has lost 3.5% vs the highs seen a couple of weeks ago. We could see cable drop further should the Bank opt for a 25-basis point hike.

Exchange rates will also be affected by the tone of the Banks commentary. UK inflation has reduced but is still elevated around 8% and significantly higher than the target level between 2-3%. Markets are expecting UK interest rates to peak around 6%.

If the Bank raise rates by 25-basis points that leaves the door open for two further hikes to bring rates to the terminal level. However, a suggestion that the bank is close to their terminal level could shift expectations lower and cause the pound to weaken.

Last week the Federal Reserve in the US and the European Central Bank both opted for a 25-basis point rise.

Based on forecast data collated by Lumon from 54 banks and financial institutions, sterling is trading above the 3-month average against the euro and dollar.

Please reach out to us below for further information on the market.

Could the Bank of England surprise the markets again this week?

GBP EUR Dips After Spanish Inflation Jump 

The Pound has managed to hold onto much of its recent gains against the Euro recently, as it continues to trade towards the top end of its annual range.

Last month increasing expectations of further interest rate hikes pushed the Pound to a high of 1.1750, and at the time of writing the GBP/EUR pair are trading within 0.75 cents of this 11-month high.

This week, the Bank of England (BoE) is expected to raise interest rates to the highest level in 15-years.

The general expectation is for a hike of 0.25% which would take the base rate of interest up to 5.25%. Financial markets will be following the lunchtime update on Thursday closely though, as back on the 22nd of June when the BoE last hiked interest rates, they sprung a surprise and opted to hike the rate by 0.5% which was above market expectations.

City traders have outlined a 75% chance of 0.25% and a 25% chance of 0.5%. If the Bank of England spring another surprise it could result in a market reaction so if you’re following the Pound closely it’s worth being aware of this economic data release.

A greater hike than expected could push GBP higher, as this would be a more bullish move than expected.

The commentary from the BoE that comes after the policy update is also important, as up until now the expectation for rate hikes is set to peak around 6% but last months drop in inflation could result in a lower peak.

Aside from this monetary policy update there will also be second readings for PMI releases this week for Manufacturing, Construction and Services figures. No changes are expected from the initial readings so if the readers remain the same, I think Thursday’s BoE update will be the key release this week for GBP exchange rates.

Sterling drops against the Euro and Dollar following inflation reading

Sterling has dropped in value against the euro and dollar following yesterday’s release of UK inflation data. Inflation has dropped to 7.9% which is lower than the expectation of 8.2% and the lowest reading for more than a year.

GBPEUR is trading more than 2% lower than the highs seen in the last couple of weeks. A transfer of €200,000 is buying £3400 more.

The unexpected drop off has shifted expectations on what the Bank of England will do next regarding interest rates. UK interest rates have been rising for over 18 months in attempt to bring inflation under control. This drop off is the first signal that interest rate rises could be having a positive effect.

Prior to yesterday’s data, peak interest rates were expected to be as high as 6.5 -7%. This was buoying the value of sterling against its major counterparts. Peak rates in the Eurozone and US are expected to be much lower.

Markets are now expecting interest rates to peak below 6%. Key central bank meetings are due in the next fortnight so we could see continued volatility depending on outcomes. First will be the Fed on 26th July followed a day later by the ECB, with the BoE on 3rd August.

Despite yesterday’s sell-off, sterling remains within range of the highest levels seen this year for buying euros and dollars.

Retail sales data released tomorrow could provide further volatility. An unexpected drop here would firm up the belief that interest rates are starting to have a positive effect and therefore weaken the position of sterling.

Please reach out below for further information on the market and forecast data collated by Lumon. I would be happy to talk through the cost implications rate movements will have on your upcoming payment or purchase.

Could UK inflation data be the most important data release this week?

Tomorrow morning UK inflation rates will be released in the early hours in what appears to be the most important economic release this week, at least for the UK markets and the Pound.

The inflation figures are measured in the form of CPI (Consumer Price Index) and as this release can impact monetary policy adopted by the Bank of England, the release carries the potential to influence the currency markets.

The expectation is for an annualised CPI figure of 8.2% to be released for June. This is a decline from the previous months figure of 8.7% but still above the Bank of England’s June forecast of 7.9%.

The 8.2% prediction will be key, as if the rate of inflation remains above this level it increases the chances of future interest rate hikes. This expectation of further rate hikes has resulted in the Pound climbing in recent months.

Whilst the UK economy isn’t thriving the Pound has been due to the 13 consecutive interest rate hikes carried out by the BoE (Bank of England), with expectations of further hikes as soon as next month.

The current expectation is for the base rate of interest to reach at least 6% by the end of the year, and tomorrows data release could determine whether or not this happens hence the build-up within the finance world to tomorrow’s release.

There could be a drop in the Pounds value if the figure released is below 8.2% as if inflationary pressures ease, there may not be the need for the BoE to continue hiking exchange rates.

Economic policy, and its anticipated direction has been the main driver of GBP exchange rates recently. This contrasts with the past 5-years or so when politics was most certainly the main driver of GBP exchange rates due to Brexit.

Do register your interest with us if you’re planning on making a currency exchange involving the Pound and wish to be kept updated regarding potential market movements.

Sterling back above 1.17 against the euro!

Pound to Euro Starts the Week off Steady

Sterling back above 1.17 against the euro

Pound sterling opens this morning’s session back above 1.17 against the euro. 1.17 is a key threshold for the pairing and has only been breached on a couple of other occasions this year. GBPEUR is therefore trading within range of the highest levels seen since August 2022.

A transfer of £200,000 is buying €12000 more vs the lowest level of 2023. This presents a real opportunity for euro buyers.

Forecast data collated by Lumon from circa 50 banks and financial institutions suggests that there is a bias for GBPEUR to move lower in the next 3-6 months.

Please reach out to me on [email protected] for further info on GBPEUR, GBPUSD and EURUSD forecasts.

Cable (GBPUSD) has also seen positive movements this week and is trading above the 1.27 handle. The pairing had opened the week lower after dropping into the 1.25s momentarily on Friday.

A transfer of £200,000 is buying $18,000 more vs the lowest level of 2023.

Higher interest rate expectations are buoying the value of the pound against its major counterparts. Sterling remains one of the strongest performing major currencies of 2023.

At a recent meeting of central bankers, members from the ECB, BoE and Fed all confirmed that depending on economic data, interest rates may have to move higher to continue the fight against inflation.

Sterling could weaken if rates move higher in the Eurozone and US.

Eurozone retail sales data is released later this morning and a weaker than expected figure here could reduce the likelihood of a future rate hike.

US employment data released around midday could cause volatility during the afternoon’s session. Please reach out to us below for further information.

Will the expectation of higher interest rates push GBP exchange rates even higher?

GBP AUD Dips Again Ahead of BoE Rate Decision

The Pound was the strongest performing currency in the first half of 2023, after gaining by almost 5% against the US Dollar and by almost 3% against the Euro.

Although Sterling exchange rates dropped yesterday as the second half of the year began, it’s been a very strong first half of the year for the Pound as the expectation of higher interest rates continues to climb.

After dropping to almost parity in the wake of former Prime Minister (Liz Truss) haphazard budget last September, the Pound to US Dollar exchange rate has climbed to 1.2700 which demonstrates how strong the recovery has been for Sterling. It’s also climbed from 1.0840 to 1.1640 against the Euro during this time.

The gains are a result of the Pound becoming a more attractive currency to hold assets in, as the Bank of England has hiked interest rates on 13-consecutive opportunities pushing the base rate of interest up to 5%.

Some financial commentators have questioned whether the hikes, and anticipated future hikes have run their course when it comes to Sterling strength.

Something to factor in though, in my opinion is the expected peak continues to climb. Some speculators within the City are betting that rates will peak at 6.2% in mid-2024 which is an increase from the previous expected peak of 5.5% by the end of 2023.

Within the developed economies the UK inflation levels are highest which is the reason behind the aggressive rate increases by the Bank of England, as they try and counter the increasing cost of living.

The current rate of inflation is 8.7% and core inflation is above 7% so both figures are well above the BoE’s target of 2% which is why interest rates have continued to climb, pushing the Pound higher.

Economic data releases are very quiet today especially as there is a public holiday in the US today (Independence Day). Sentiment is therefore likely to be the main driver of currency fluctuations so do register your interest if you wish to be updated regarding GBP exchange rate fluctuations.

Will the Pound fall if the UK enters a recession?

At the time of writing the Pound is trading towards the top end of its 2023 ranges against most major currency pairs.

Last week, the Bank of England opted to hike interest rates by 0.5% which came as a surprise to financial markets, after a hike of 0.25% was expected.

Sterling exchange rates were quite volatile in the aftermath of the decision to raise rates by 0.5%, and GBP/EUR peaked just below 1.1750 which is the highest level the pair have reached so far in 2023, and just over 2-cents from the annual high.

Not only has the Pound been generally climbing against most major currency pairs, but the Euro has also seen weakness recently which has helped boost the GBP/EUR exchange rate. The weakness for the Euro is a result of Germany technically falling into recession this year after two consecutive quarters of their economy shrinking.

There have been some predictions that Germany will break out of recession due to growth in the second quarter of 2023, but the impact has arguably been felt by the Euro after the currency has weakened against both GBP and the US Dollar.

A similar pattern could be felt by the Pound if the UK falls into recession as some analysts are predicting.

Inflation levels have been increasing within the UK, which is why the Bank of England has hiked interest rates 13-consecutive times with the base rate now sitting at 5%. There are concerns over the knock-on effects of the dramatic increase in the cost of living and mortgage rates within the UK and how they could push the UK into recession. This is worth following as the Pound could be impacted by negative growth coupled with the increasing cost of living.

A number of Bank of England members will be speaking this week including Governor Andrew Bailey tomorrow afternoon. Another important data release to be aware of is this Friday’s GDP data which covers economic growth in the UK. If you wish to discuss these data releases in further detail do feel free to get in touch.

Sterling balanced for key Bank of England decision

GBP EUR Rallies After Bank of England Rise in Interest Rates

Sterling balanced

Pound Sterling exchange rates hang in the balance ahead of today’s key Bank of England interest rate decision. GBPEUR dropped to a two-week low during yesterday’s session and opens soft this morning. Cable (GBPUSD) also tapered off during the day.

Today’s interest rate decision is key because inflation has become imbedded in the UK economy. Data released yesterday confirmed UK inflation is at 8.7%, higher than expectations of 8.4%. Airfares and second-hand car purchases seem to be the latest driver for increased prices.

The BoE have raised interest rates at their last 13 meetings to try and curb rampant inflation and so far, inflation does not look like it will be returning to their target level of 2% any time soon. Sterling’s value has benefitted from the previous rate hikes and remains balanced ahead of today’s decision.

What are the expectations?

Markets are expecting a 25-basis point move from the Bank and this may have been priced into sterling exchange rates over recent sessions. However, there is an outside chance of a 50-basis point hike which would likely buoy the value of the pound.

Mortgage analysts in the UK are now predicting that interest rates could get as high as 6% by the end of the year.

What are the long-term effects of higher interest rates?

Interest rate rises are a direct attempt to cool down spending in the economy by pushing up the cost of borrowing. This means businesses will have less capital available and households’ disposable income will decrease leading to less spending.

Higher interest rates can lead to a slowdown in economic growth and cause a recession. This would be negative for Sterling’s value. GBPEUR fell to almost 2-year lows earlier in the year amongst recessionary rumours.

Some analysts are now suggesting a recession may be needed to finally bring inflation back to 2%

Sterling’s rise continues against the euro and the dollar

Sterling’s Rise

Sterling is continuing to rise against the euro and the dollar. Sterling had entered the year on a negative footing due to forecasts suggesting the UK would face a deep and lengthy recession in 2023.

The recent economic data has directly contradicted the earlier forecasts. Yesterday, UK GDP posted a positive reading of 0.2%, showing that the UK economy grew month-on-month, contributing to sterling’s rise.

The Bank of England and IMF have now revised their economic forecasts for the UK and are both predicting growth in 2023.

GBPEUR is trading close to the highest level seen since August 2022, whe cable (GBPUSD) is trading close to highest levels seen since April 2022.

Central banks and interest rate policy

Interest rates are a key driver for exchange rates. A interest rate hike lends support to the value of a currency, where an interest rate cut weakens the footing.

Last night the US Federal Reserve announced that they would pause raising interest rates. The Fed have been raising interest rates for more than 18 months to bring inflation under control. US CPI now sits at 4%, lower than expectations of 4.1%.

Today is the European Central Bank interest rate decision, and they are widely expected to hike rates by 25 basis points. The markets will be looking to digest any commentary regarding future rate expectations.

In the UK, the BoE will meet a week today. UK inflation remains elevated at 8.7% much than in the EU (6.1%) and US.

Expectations are for interest rates to rise again by 25 or 50 basis points. A 50-basis point hike may lead to some volatility.

In the short term, higher interest rates are likely to support sterling’s value, however, the long-term economic impacts of embedded inflation could weaken the UK’s economy and impact sterling’s value.

Recent Posts

None of the information contained in this website constitutes, nor should be construed as financial advice. It should not be interpreted as a solicitation to offer to buy or sell any currency or as a recommendation to trade.

Where interbank exchange rates are referenced within the website these should only be used as a guide on the performance of a market. These rates are not indicative of our exchange rates – please contact us for a quote.