Central bank decisions to lead the way this week

By Lauren Buckner

As the festivities begin to pick up and focus moves towards the ‘big day,’ we have a key week ahead for currency and other financial markets with the ‘Big 3’ central banks meeting to decide upon interest rate policy, amongst other important data releases.

Interest rate changes have been the main driver of currency fluctuations over the past two years as the world economy began its recovery from the Covid pandemic. With inflation levels racing higher, interest rates had to rise in order to attempt to control prices and promote a healthy economy, and the higher the central rate of interest is, the higher the demand for the currency. The Pound has been performing well recently, particularly against the Euro, as UK inflation rates remain higher, and talk of continued high levels of interest bolster its performance. The Bank of England are widely expected to hold interest rates at 5.25pc at it’s Thursday meeting, the commentary will hold particular importance as previous suggestions of a move closer to cutting rates have impacted Sterling significantly and had seen it move lower.

For the US and the EU, both with inflation levels in the 2 -3 pc range now (the central banks target remit) the focus is on how quickly a cycle of rate cuts will begin and whether this could be as early as Q1 2024. The euro has weakened over the past few weeks on the back of poor economic data, particularly for Germany, and there is increasing pressure on Christine Lagarde’s board to provide direction on their policy for 2024, and how quickly an interest rate cut could happen in order to relieve some of the economic pressures being felt in the bloc. The single currency has been dropping in value in anticipation of a rate cut in the first quarter of 2024, and any change in expectation here is likely to cause ripples for those needing to purchase or sell euros.

For the US, we have key inflation data released tomorrow afternoon ahead of Wednesday evenings interest rate decision, with commentary from FED chair Jerome Powell being particularly key. There are fears that US interest rate levels have a stranglehold on its economic performance however, this is less so since strong labour market data at the end of last week. Employment and wage growth in the US is still strong and therefore the risk of stagflation (higher inflation and increasing unemployment) is reducing and expectations that interest rate cuts could happen early next year have now been moved to May/June 2024.  The US, as one of the World’s largest economies, holds particular significance as any challenges here can impact us all.

Volatility is to be expected around these key decisions on Wednesday and Thursday this week. Although personally many are starting to move their focus towards Christmas and the end of 2023, financial markets face an important week. Don’t be caught out in the frivolities, and consider your currency positions before markets might move. Please get in touch with the friendly team at A Place in the Sun Currency to discuss your requirements sooner rather than later.