By Lauren Buckner
The Pound appeared to benefit from yesterday’s thin trading conditions as currency markets saw a drop in trading volumes while the US enjoyed their July 4th celebrations.
Edging up against both the Euro and US Dollar through the afternoon it seems that the good winds behind the Pound are linked to the rise in UK gilt prices. In simple terms, a gilt is a loan from the holder to the UK government, and following the recent move upwards in UK interest rates the returns on UK gilts have continued to rise to their highest level since 2008. A particular rise in international buyers of UK government debt can be seen, increasing the demand for GBP and in turn its price if demand is high enough.
With a fairly quiet week in terms of major data, the market perhaps is turning its eye towards the medium term outlook on currencies as we begin H2 2023, and the picture is not overly clear. The UK and US have seen a rather aggressive cycle of interest rate rises as leaping inflation has coupled with stable employment conditions; this has helped both GBP and the USD maintain strength through the first half of the year, particularly against the Euro. However, the outlook for the second half of the year is becoming cloudy and therefore risky for those needing a currency trade.
If we look at the Pound for example, rising interest rates (predicted to move through 6pc before year end) coupled with a robust employment market and slowing housing conditions could in fact be enough to tip the balance from a growing economy to one that is contracting. As consumers continue to battle high inflation, particularly around aggressively rising food prices, the Bank of England will be pressured to continue to raise interest rates, and affordability is becoming a real concern. Will this be a step too far for consumers and force the economy in to recession? Is the previous good news now starting to turn bad? This will impact currency rates. A similar conversation is taking place in the US, and this evenings FOMC meeting minutes are keenly anticipated followed by Friday’s employment data.
For the EU, interest rate rises continue to lag behind that of the UK and the US, and recession conditions already being seen, and this has supported the recent gains made by Sterling here, but could this all be about to change? Please make contact with the team to discuss currency requirements that you may have up to and through year end. There are tools available to secure your currency rates in advance, and with much uncertainty ahead, some peace of mind is worth exploring.