By Matthew Boyle
The Pound seemed to have performed relatively well in recent weeks, pushing the Euro close to two month highs and the US Dollar close to three and a half year highs.
However we have seen a retreat this morning by the Pound, after the ONS reported UK growth had flatlined in July at 0%. Combined with ongoing political uncertainty and some worrying economic markers, it raises the question are more losses to follow?
Political uncertainty is high following former Deputy Prime Minister Angela Rayner’s tax dodge admission and subsequent resignation. UK borrowing is at the highest levels they have been in 27 years and we are fast approaching the autumn budget on 26th November. With growth announced to have flatlined and being an indicator of the fiscal hole Reeves will have to plug, it seems we should expect the budget to get tougher by the day.
Given the current market landscape and hurdles the Pound faces, it is perhaps somewhat of a surprise GBP is at these levels against the majors. Certainly this is helped by weakness in the Euro and Dollar. Ongoing political unrest in France and poor Ecostats have no doubt encouraged GBP>EUR rates to improve. Whilst US inflation data this week showed an uptick, putting pressure on the FED to cut rates, which is expected to happen next week.
The Bank of England interest rate decision is also next week however the likelihood of them cutting rates is basically zero, and with UK inflation at 3.8%, far above the target of 2%, odds for a second cut this year are waning.
This is helping the Pound as far as exchange rates go however, as currently the UK has the second highest level of interest rate of all the countries in the G10 and will become the highest following the expected FED cut next week.
It is a fine balance for the Pound – being propped up by high interest rates against a weakening Dollar and unsettled Euro but suffering political uncertainty, mounting government debt and a looming budget that is expected to be brutal.
Undoubtedly the next few weeks will be a telling for the Pound’s future.
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