By Lauren Buckner
Sterling strength continues to dominate currency markets at present, closing last week at a fresh ten month high against the euro and a 14 month high against the US Dollar.
The recent gains in both UK gilt prices and the value of the Pound can be attributed to a significantly better than expected economic performance for the UK. As 2023 began Sterling was still bruised and battered from Liz Truss’ short stint as Prime Minister and predictions of a deep rooted recession throughout 2023, however last week it was confirmed that the UK economy has again begun to grow. Increased consumer spending on cars and entertainment prompted a tentative 0.2pc growth in the UK economy for April, as the strikes across the rail networks began to subside.
With consumer confidence driving the improvement in economic performance alongside recently improved wage growth data, and continuing high levels of inflation (+8.7pc), Thursday’s Bank of England meeting to decide on interest rates has firmly been decided by traders. The firm consensus is for a 0.25pc increase in UK interest rates to be announced by the BofE pushing the headline rate up to 4.75pc from its current 4.5pc level, a prediction firmly priced in to the Pound’s current value.
The accompanying press conference given by the Bank of England also holds great importance as markets look for further indications on the future policy stance of the UK’s central bank. With already deep rooted expectations of another 2 rate rises through the second half of 2023 after June’s meeting (to raise the headline rate to 5.25pc by year end), there will be keen interest in any suggestion from the Bank of England that their policy stance diverts from this path. If this is suggested you can expect currency markets to react aggressively.
Wednesday’s UK inflation data release will also give a chance for markets to draw further assumptions of policy stance for the BofE ahead of their Thursday meet. The higher inflation is the higher interest rates will be predicted to go, as UK Chancellor Jeremy Hunt recently reminded us that interest rates are the Bank’s key tool to fight against rising inflation, this has been the main driver in Sterling’s recent good fortune. Forecasts suggest a small decline in UK inflation to 8.5pc. Sterling will need to navigate this tricky opponent, particularly if the data undershoots these predictions. We also see Retail sales and manufacturing data releases from the UK before week end, two further opponents for Sterling to navigate.
As the Pound dominates recent market movement eurozone data has done little to derail the move in the current GBP/EUR levels. it was confirmed last week that the EU economy was actually in recession at the end of Q1 2023 following a revision of GDP figures. With inflation falling sharply in the bloc from 10.6pc last autumn to 6.1pc in May the European Central Bank raised interest rates as predicted by 0.25pc last week to 3.5pc – a 22 year high! Interestingly, the ECB were bullish in their assessment of stubbornly high inflation in the EU and has indicated a further rate rise at their next meeting in July. Predictions of an interest rate peak at 4pc as opposed to previous 3.75pc are now in action.
From the US, a steady decline in food and energy costs and therefore inflation (currently at a palatable 4pc) saw the Federal Reserve pause interest rates at their current benchmark of 5-5.25pc. Signalling just two more possible interest rate rises between now and year end the recent run of US Dollar strength has begun to tire (for now).
Interest rates continue to be the main focus of investors and traders alike in determining the value of a currency, although Sterling currently dominates that fight we see it now sitting at some key levels and matching predictions of its peak value from the Bank of America against both the Euro and the US Dollar, this could be a short lived opportunity for those selling Sterling to capitalise – no doubt this week will reveal more, and uncertainty and therefore volatilty is likely to continue. Keep in touch with the friendly team at A Place in the Sun currency to discuss your upcoming currency requirements.
Data releases of note this week:
US bank holiday
EU – German PPI
*UK Core inflation rate YoY
*UK – Inflation Rate YoY
US Fed chair Powell testimony
EU – ECB General council meeting
*UK – Bank of England interest rate decision US – Fed chair Powell testimony
Japan – Inflation rate YoY
UK – Retail sales
EU – Manufacturing flash survey
UK – Manufacturing and Services PMI