By Lauren Buckner
Following some rangebound trading at more favourable rates for the Pound of late, we enter the most critical two days we have seen for some time when looking at global economic performance and outlook. This is due to interest announcements from the US (this evening) and both the UK and the EU tomorrow.
Interest rate policy has been a key driver in money markets through 2022, and in the face of rocketing inflation across the globe central banks have been making bold decisions in an attempt to curb price rises. In the face of impending recession this has become a challenging balancing act. Even more so as some historic price rises (UK inflation at its highest in over 40 years) have been fuelled by the Russian invasion of Ukraine and spiralling energy costs rather than consumer prosperity. In fact, quite the opposite, higher inflation is hurting many particularly as the colder weather kicks in.
The fact remains however, the higher a country’s rate of interest the more attractive an investment opportunity that country and therefore that currency represents – this has undoubtedly been helping the Pound of late. Although many clients comment that the current value of the Pound is poor – it would undoubtedly be much worse if our interest rates had not increased so dramatically this year.
Following the surprise fall in US inflation levels earlier this week (7.1pc versus prev 7.7pc) the expectation is for a 50 basis point raise this evening by the Federal Reserve rather than the 0.75pc previously anticipated. Overall, monetary policy is now predicted to be tightened more slowly at 0.25pc from January and to peak at around just 5pc in May 2023 – lower than previous expectations. As a result the USD has weakened against both the Pound and the Euro to the best levels in around six months.
Both the Bank of England (BofE) and the European Central Bank (ECB) are expected to follow suit with 0.5pc rises to interest rates when they meet on Thursday. What will be of key interest from both meetings is the accompanying press conferences where the tone of the central back will be key to the rate of exchange – current rates could change dramatically depending on the sentiment expressed!
The ECB is under fire due to their (typically) over cautious approach to rising inflation in the bloc, a pertinent issue for Europe as energy costs and supply from Russia has changed throughout the year and therefore markets will be assessing their tone closely and exchange rates will move accordingly.
The Bank of England on the other hand are facing a very difficult task as the UK economy currently faces the worst growth outlook of any large economy. As house prices fall to their lowest levels since 2008 and millions of public sector workers go on strike the risk of continued and deep rooted high levels of inflation remain, the BofE will need to signal further intervention in the market with the aim to curb spiralling prices and shorten the recession. Any divergence from this could be damning for the Pound.
With this mornings inflation figure showing a surprising fall in price increases for the year to November at 10.7pc from Octobers 11.1pc, the Bank of England’s course of action moving forward may be questioned. If language used by the Bank suggest that they may slow down the predicted rase in rates through 2023 the Pound could drop dramatically.
It really is difficult to convey how important all three policy meetings will be to exchange rates – and impossible to predict the outcome of each one. However, what is clear is that uncertainty over the next 36 hours is incredibly high and that there is a risk that the rates we have become used to around the Pound could change rather dramatically. For certainty, it is worth considering taking advantage of current levels today. Please get in touch with us on 0208 051 8555 to discuss further.