By Simon Eastman
The last couple of weeks have been packed with events causing the currency market bouts of heightened volatility, with the pound faring well at the end of last the week. First, the Labour government delivered their first Budget to the House of Commons and introduced the highest tax rises in 40 years. After the statement, investors shied away from the Pound and as result Sterling dropped around one and a half cents against the Euro and just over a cent against USD. Second, last week the US voted for their next President of the United States, as Republican Donald Trump was elected in a comfortable victory after winning all the vital seven swing states. The result gave the USD a surge in the financial markets, on the currency side, USD rallied against the Euro with its best performance against the single currency in eight years. Sterling also had some fortune against the Euro post-US election, gaining around a cent on the frail Euro which brought fresh two years highs for GBP-EUR at the end of last week’s trading. Third came the Bank of England’s interest rate decision as they cut the rate by 25 basis points. This came as no shock as a cut was widely expected; what wasn’t expected were the plans from the BoE’s for no further short term cuts implied at the press conference following their decision. As a result the drop off for sterling against the Euro that was expected, didn’t come to fruition, due to the unexpected scale of tax rises from the Labour government the previous week.
BoE Future Interest Rate Outlook
After the Bank of England cut interest rates on Thursday last week, the governor of the BoE Andrew Bailey spoke at a press conference after the announcement and explained the reasoning behind the cut and the thoughts of the monetary policy committee members for further cuts going forward. Mr Bailey pretty much ruled out another cut in December which was not expected, previous reports had suggested that the Bank was planning on consecutive cuts in both November and December. However, since the Budget was announced which will see the government borrow substantially more than expected in the coming years to fund a big boost to public spending, this has changed feelings amongst the BoE members, as higher taxes are expected to bring higher inflation and as result the plans to consistently cut the interest rate has seemingly been dashed. Reports from Bloomberg are now suggesting that the BoE will only make 2 more cuts from now until 2026, they project that the economy is to be at capacity until 2026 and inflation to stay above the 2.0% target until 2027, should this be the case then the BoE may take a more cautious approach in cutting rates which is likely to benefit Sterling as high interest rates have strengthened Sterling over the past couple of years. One thing is for certain and that is the unpredictability of the currency market going forward so it is prudent to stay in contact with your currency consultant for informative professional guidance.
The Week Ahead
A quite start on Monday for data releases but from Tuesday there are lots of data announcements that are likely to affect the currency market. Key releases to note for the week, tomorrow the UK posts the employment rate in the country. On Wednesday afternoon CPI data is released. Overnight on Thursday Unemployment rate is posted in Australia. On Thursday morning GDP is announced in the EU, in the afternoon PPI is posted in the US, there are also speech from Fed Chair Jerome Powell and BoE Governor Andrew Bailey on Thursday Evening. On Friday the UK posts GDP, and in the afternoon the US release retail sales figures.