Inflation and interest rate impact

By Kian Songra

Sterling has continued to stay buoyant for now with the GBP/EUR rates still hovering around the two-year highs. How long the rates will hold firm in this current trading level, could be determined by the key data in the week ahead.

Turning our heads to the US, the dollar lost ground on both the pound and euro after posting lower than anticipated retail sales figures of 0.1%, which has fuelled dovish bets for the Federal Reserve (FED). Investors are also digesting comments made by the various FED members in anticipation in how many rate cuts are going to be made before the end of the year. This follows on from comments made that the FED are favouring the acquisition of more data before any significant actions are taken.

Critical second half to the week

Notably, this morning we see the release of the inflation reading in the UK, which has fallen to 2%, which is the target level of inflation. This brings an end to a 3-year battle, which has taken inflation to its lowest reading since July 2021. With inflation being released in line with the expectations, it may pave the way for an interest rate cut and so we may see increased volatility ahead of Thursdays pivotal interest rate decision. The Monetary Policy Committee (MPC) will be keeping a keen eye on the inflation figure, as it is a key indicator to help determine their decision on when to cut the rates. The MPC has continually emphasised the need for a restrictive monetary policy to return inflation sustainability to the set 2% target, with the Bank of England (BOE) committing to adjusting policy as warranted by economic data. If inflationary pressures are shown to be under control it will increase the pressure on the policymakers to start cutting the interest rates. Today’s trading session could be unpredictable, as anticipation grows that the BOE will look to make summer cuts to the interest rates.

To keep vigilance on the upcoming election, this milestone achievement could provide Rishi Sunak with a boost in the polls and a turn of fortune may cause uncertain times ahead, creating instability within the markets. This in mind, whenever there is political uncertainty, it may cause the pound to react accordingly and so attention towards the release of the upcoming polls will be important in determining how it will impact the pound.

It is speculated that the interest rates are to be held at 5.25% and if this is the case, we could see the pound keep its dominance over the euro. However, it will be the conference held after the decision that could shake the pound. The comments will be closely scrutinised and any indications on the when the BOE may look to cut the rates, could cause increased volatility with the participants pricing into action the future plans. These comments alone could cause the recent breakthrough of the current trading levels to be stripped back as we could be leaning to a rate cut, which is seen as negative for sterling. With this in mind consider getting in touch with your dedicated consultant to look at minimising any downside risk with the various payment options to secure your currency ahead of the potential volatility.

Another key component of the interest rate decision to look out for is to see how the votes are split between the committee members. The previous reading showed two members voting to cut the rates with the remaining seven looking to hold the rates. If the number of members showing intent to cut the rates increase, we could see signs of a rate cut on the cards for the next reading in August.

Thursday also sees a flurry of US data, with Initial jobless claims being a data release that could see the dollar be pegged back further if the release is out of line with the expectations. This occurred in the previous release, when the people claiming unemployment benefits in the US came out 13,000 higher, to jump to the highest reading since August 2023. This resulted in dollar weakness as it signalled to investors a weaker US economy.

Friday sees the retail sales figure being released in the UK to end the busy week of UK data. It is predicated to show an increase from the previous negative reading of -2.3% to 1.5%. This again, could impact the pound with a stronger reading being seen as bullish.

This week’s UK inflation reading, and Bank of England’s interest rate decision are set to be pivotal for the currency markets. Those with upcoming currency requirements should brace for potential volatility and consider both economic indicators’ outcomes when making trading decisions. Stay in regular contact with your consultant at A Place in the Sun Currency so they can keep an eye on these events. These data releases will be crucial for understanding the pound’s near-term trajectory and possibly look at discussing your options to create peace of mind for your upcoming purchases.