Critical 48 hours for the Pound

By Matthew Boyle

Yesterday’s focus and big market mover was GBP>USD. Following a PPI inflation report in the US coming in at 0.2% – half the 0.4% figure that was expected saw the Dollar unfurl allowing GBP>USD rates to rise to the best they have been in several months. This surprisingly low figure could mark the end of the Fed’s aggressive rate hiking policy and signal a turning point in USD rates particularly after a prolonged period of unwavering USD strength.

Today and tomorrow it is the Pound that takes centre stage with two key releases – inflation figures the highly anticipated Budget statement, both of which are likely to cause significant movement in rates and will shape the path for the Pound in the coming months.

UK inflation interestingly poses a quandary to the market: a lower-than-expected reading could cause a rally as it will be seen to ease the economic struggles ahead but on the other hand might see the Pound decline as a lower figure eases the pressure on the Bank of England to continue to hike interest rates.

As such it is often an indicator of market sentiment. Figures released earlier this morning show inflation now sitting at 11.1% up from the predicted figure of 10.7% which has seen the Pound lose ground. It seems therefore markets are less focused on further rate hikes by the Bank of England but more towards the real and negative impact this increasing figure will have.

Tomorrow we see Jeremy Hunt lay out tax and spending plans for the coming weeks and months where he will attempt to instil confidence in markets and foreign investors the UK economy is sustainable and recovery is on the horizon.

Reports suggest currently there is a fiscal hole in the UK economy that ranges between £20 to 60 billion which needs to be filled through spending cuts and tax rises.

Regardless of how well Hunt might deliver, no amount of spin or charm can get away from the fundamental fact – this highlights and spells a a significant slowdown in the UK economy which makes it hard to see how this plays out well for the Pound.

Unquestionably the next 48 hours are mission critical for GBP. How the market reacts to inflation is as mentioned a tough call and often is a sign of sentiment. The downward swing we have seen the morning might give a clue to GBOP sentiment currently and ahead of what is likely to be a horror-show budget may have sparked a downward move which by the end of tomorrow could conceivably leave the loss as much as 5% or more. BNP Paribas forecast GBP>EUR rates will decline to just over 1.05 by the end of the year due to slowdown in growth and negative real rates – the worst combination given the UK relies heavily on foreign investment.

Whilst it might be said this is somewhat of a pessimistic view, in current market conditions being optimistic feels sadly misplaced.

Pragmatism therefore no doubt offers the most sensible and prudent approach. With so much at stake in the next 48 hours if you would like to protect your rate and remove the risk that the Pound may dump, speak to your Currency Consultant at A Place in the Sun Currency today.