By Luke Dyson
For the week to date we have seen a large amount of volatility across the board for sterling, which is still trying to gain traction. Against the euro we have seen GBP trapped in a rangebound market for a few weeks now. Although we did see some gains for GBP earlier this week, they were short lived as they have now dropped back to early Feb levels.
The Pound sharply fell across the major G10 currencies, this was off the back of the UK inflation numbers dropping more than expected to now 10.1% behind the expected 10.3% , resulting in investors reducing hope for future interest rate hikes by the Bank of England. It is still likely another two rate hikes will go ahead at 25 basis points, although it is expected the BOE will begin to cut rates in the third quarter of 2023. This would be in reaction to falling inflation and the slowing of growth.
Following on from the UK’s CPI inflation figures, it has now created a rally in UK bond yields – Gilts – as they are now more in demand to the relative offering of peers in the US and Eurozone. Investors are now more inclined to buy bonds when they believe better inflationary conditions are ahead as this lowers the risk of the value being eroded away.
However this sudden demand for gilts resulted in a sudden decline of the Yield relative to elsewhere with it now creating a mechanical drag on the value of the pound moving forward.
As the UK two year yields declined by 2.5%, the German equivalent rose by 0.35%.
European Central Bank governing member Isabel Schnabel announced this morning that another 50 basis points interest rate hike in March will be required under virtually all scenarios. This is on the belief she sees a risk of the markets underestimating inflation.
Although sterling has taken a bit of a drop over the last couple of days, it could still be a very good time to buy euros given where the market has been previously or even in fact where the market could be in the weeks to come, as the eurozone still look to aggressively hike interest rates moving forward.
If you have an up and coming currency requirement whether you are buying or selling euros get in touch with A Place in the Sun Currency so we can establish a strategy and help you buy or sell at a sensible time.