Start of a snowball slide for Sterling?

By Matthew Boyle

The release of UK wage and unemployment data yesterday suggests that the UK labour market is easing and has taken a change of direction. Whilst this spells good news for our recovering domestic economy it does add significant downward pressure on GBP exchange rates. Data releases yesterday showed that while wages didn’t grow as fast as the 6.8% expected, they were still up at 6.7% from the previous 6.6%.

Unemployment data then provided a big shock showing a rise of nearly 50k claimants when the expectation was it would shrink by 10K. This growth in claimants combined with the fact 182k new jobs were created in the UK during Q1 is a clear signal more people are now returning to the employment market. Its is this market and wage growth combined that eases inflationary pressure on the Pound and in turn the Bank of England’s need to further raise interest rates.

With most suggesting that the BoE will only make a 25bp once more next month, this change in the UK employment market could further slow the final stages of the programme. Given the fact it has been predominantly Central Bank action that has shaped the market for over a year now and the BoE hikes being largely responsible for Pound strength, yesterday’s events start a snowball that will trigger potentially an avalanche sized slide for GBP against the Euro.

UK inflation data is released on the 24th and this will be key to whether the rates can withstand in the short term. With them currently sitting close to a 6 month high, don’t be surprised by a slow fall as markets price in as we get nearer that date. A slow in inflation combined with the surprising UK labour data could damage the Pound significantly.

However, it is not just a weaker pound that causes concern over what could begin a very significant shift in rates, but also a strengthening Euro.

Whilst the UK is coming towards the end of interest rate hikes Europe is getting into their stride having started their programme some 6 months later. Whilst the Pound benefited from a head start against the single currency when rates were first raised in December 2021 (four months earlier than expected), it looks like this head start will soon be conceded.

And the slow start by the ECB is a double whammy hit to the Pound as the Federal Reserve is also suggested to be coming towards and end to hiking rates. News that the US are fast approaching their own debt ceiling combined with this only adds concerns for GBP>EUR rates.

If you imagine a see-saw with GBP in the middle and the Dollar and Euro each side one going down encourages the other up and vice versa. A weakening dollar will only encourage the Euro to strengthen and so GBP>EUR rates to fall.

And whilst it is great news that has emerged that the UK will provide Ukrainian air support and pilot training – hopefully to bring a quicker and safer conclusion to the war. An easing of the conflict encourages EUR strength given the effect it has suffered because of its proximity and so only encouraging rates to drop further.

Some may suggest that for all the above to happen it would require a perfect storm. Perhaps… but we can say with some confidence that a storm is coming, with this the calm before it. With inflation data next week and US pressure helping the Euro make gains it could be a final window of opportunity to take advantage of near 6-month highs ahead of the important CPI release on the 24th.

If you have a large transfer or upcoming property purchase required in the coming months speak to your currency consultant at A Place in the Sun Currency to discuss the outlook and your options.

There are several ways we can help you mitigate risk – buy and hold, tranche trading / cost averaging and forward contracts which allow you to fix your rate now for a future purchase. Your consultant will be able to run you through some options that could save you thousands on your all important purchase of your own place in the sun.