By James Caley
Recent headlines have been primarily focused on interest rates and inflation, and this trend continues today with monetary policy speeches scheduled from both the ECB and the Federal Reserve.
Changes in the UK’s interest rate expectations have significantly impacted exchange rates, particularly following last week’s dovish Bank of England policy decision. Market sentiment suggests a heightened possibility of an early interest rate cut, potentially as soon as June rather than the previously forecasted August, especially if there is a downward revision to inflation.
As a result of the above the Pound to Euro exchange rate experienced a dip to 2-month lows on Friday, followed by a modest recovery on Monday with a similar pattern observed for GBP/USD rates, which also reached a low point on Friday.
Investors tend to favour currencies where the corresponding interest rates are high. Conversely, when interest rates decline, investor returns in that currency diminish, prompting a shift to other currencies or safer havens like gold and silver.
The expectation is ‘when’ interest rates drop in the UK, the strength of the pound may well weaken at the same time.
As it stands, the future is uncertain if you’re holding sterling and need to buy Euros or Dollars. If you’re concerned about potential rate drops impacting your upcoming currency requirements, consider mitigating your risk and using a forward contract to lock in current rates. For more information on this strategy, feel free to reach out to your currency consultant at A Place in the Sun Currency.
It’s both a short week and a quiet week for UK data but with plenty going on elsewhere (even on Good Friday) it’s worth considering the following:
Data this week
Wednesday:
ECB’s Cipollone speech – monetary policy
ECB’s Elderson speech – monetary policy
EUR Consumer Confidence
EUR Economic Sentiment Indicator(Mar)
USD Fed’s Waller speech
Thursday:
GBP Gross Domestic Product
USD Gross Domestic Product
Good Friday:
USD Core Personal Consumption Expenditures – Price Index (MoM)(Feb)
USD Core Personal Consumption Expenditures – Price Index (YoY)(Feb)
USD Fed’s Chair Powell speech