By Michael Jacobsen
The Bank of England recently decided to keep the UK’s main interest rate steady at 3.75%. Even though everyday inflation is still a bit stubborn at 2.8%, the Bank believes that falling global energy costs will naturally cool down prices over the coming months. Because the Bank signalled it may be finished raising rates for now, international investors have pulled some money out of the Pound. This has pushed the GBP/EUR exchange rate down to a 20-day low, hovering around the 1.1530 mark.
Over in Europe, the economic picture is more complicated. Eurozone inflation jumped to 3.2% in May due to recent energy price spikes, forcing the European Central Bank to hint at fresh interest rate hikes this summer to bring costs under control. While the prospect of higher interest rates is keeping the Euro strong, the Eurozone’s overall economic growth is flatlining. This means that while the Euro is currently getting stronger than the Pound, its growth potential is still being held back by a weak economy.
Meanwhile, a strong US Dollar is acting as a heavyweight over both the Pound and the Euro. The Dollar remains highly attractive to global investors because US interest rates are expected to stay higher for longer than those in Europe. Whenever there is global economic uncertainty, international businesses rapidly move their funds into the safety of the Dollar. This regular shift in global cash frequently weakens both the Pound and the Euro at the same time.
What to Expect This Week (22nd–26th June)
Clients should watch out for two major updates this week that may cause sharp moves in exchange rates. On Tuesday, new business health surveys (PMIs) will show whether the UK and European economies are expanding or shrinking. Then on Thursday, the US will release its latest key inflation figures. If US inflation comes in higher than expected, it could trigger a sudden drop in both the Pound and Euro as investors rush back to the safety of the Dollar.
If you have any upcoming currency exchange requirements, please speak with your currency consultant for tailored guidance based on current market conditions to help make your money go further.