Inflation boosts Pound but is there trouble ahead?

By Matthew Boyle

GBP/EUR

Sterling Euro rates have remained within around a cent off the best they have been in 2.5 years since the UK election in somewhat of a surprise given the expectation of a drop after a Labour win. As we know, exchange rates and in particular GBP/EUR have over the last couple of years largely been driven by central bank policy and interest rate changes.

Higher interest rates are good for a currency as they attract foreign investors looking for higher returns. Whilst inflation in the UK has been dropping and the Bank of England has started its programme of cutting rates, their programme has been slower and less aggressive than the European Central Bank’s, with the BoE to date cutting rates once vs the ECB’s 3 rate cuts. This has kept the pound relatively strong against the single currency and exchange rates high. Furthermore UK Chancellor Rachel Reeves’ announcement of a change to government borrowing rules now gives Starmer and the Labour government around an extra £50bn to spend over the next year. At around 1% of national GDP, this £50bn in additional spend pushes back the bank’s programme of cuts and is a large factor as to why GBP/EUR rates remain close  to peak levels.

Inflation data this morning from the UK has shown it to be higher than expected – coming in at 2.3%, above the predicted 2.2% and the bank’s target of 2% which will only further delay future cuts by the BoE. The ball is however back in the ECB’s court this afternoon as ECB President Lagarde speaks early this afternoon. 

Whilst the notion of increased of public spending in the UK may be seen as a good thing, and high inflation is good for GBP as a currency in the short-term this may however be a ticking time bomb for exchange rates. With market focus shifting back to the macro level and focussed once again on central bank policy a delay in rate cutting still means that cuts will happen, just later than was expected.

Given that we have seen GBP/EUR rates touch peak levels close to ten times in the last 2.5 years but not go higher, this might suggest that despite the fact we are behind the ECB in cutting rates that when the BoE does, the downward pressure on rates will be significant.

Those with a requirement with Euros may like to consider taking advantage of rates where they are. As pressure and speculation builds towards a next BoE cut, this could well mount pressure on rates and so push them down.

And following this morning’s upward movement, buyers and sellers alike who are perhaps less risk averse may like to consider securing currency in advance or targeting a specific rate of exchange – speak to our team today who can take you through some of the available options to help make your money go further.

GBP/USD

Following the US election result, the USD has made significant gains across the board but noticeably against GBP – gaining almost 5% in the last 3 months.

With some political certainty returning to the US and Dollar (at least domestically) the Dollar has seen a resurgence in strength with the announcement of a wholly led Republican government with Trump as President. Whilst Biden’s announcement earlier this week to allow Ukraine to utilise US long range missiles on Russia might be controversial, the ongoing conflict there and in the Middle East will likely help the Greenback strengthen.

Whilst UK inflation data this morning has caused a spike in GBP/USD rates but don’t be surprised if we continue to see USD buying rates drop in the coming weeks and months, With Trump seen as a good leader for the US economy and the military conflict heavily impacting oil prices and so helping the Dollar, it could remain on a run for some time. This week’s announcement the UK has imposed further sanctions on Iran and China for aiding Russia could help the USD strengthen further.

Elsewhere JP Morgan suggests the strong USD will see USD/EUR rates hit parity during next year, AUD continues to weaken but is pipped by Morgan Stanley to be the one to watch in 2025 and the UK treasury committee now recommends that Crypto currency trading be treated as gambling. ECB speeches and UK retail sales on Friday are the remaining points of focus data-wise this week.   Should you have an upcoming requirement for currency speak to A Place in the Sun Currency today for some friendly and professional guidance on how to get the most out of your transfer and make your money go further.

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