By Ashley Finill
The Pound lost some ground against the Euro last week, losing around half a percent compared to this time last week. The Pound came under pressure as concerns around the UK economy and government finances continued to weigh on Sterling, with the rising cost of government borrowing once again making headlines. This has put further pressure on the government’s finances ahead of the Budget in October, with the Chancellor potentially facing some difficult decisions around spending and taxes.
At the same time, expectations around UK interest rates have changed quite considerably over the past few weeks. Inflation remains a concern for the Bank of England, particularly with higher energy prices pushing prices higher again over the coming months. Interest rates currently sit at 3.75% and at the Bank of England’s last meeting, three of the nine members voted to increase rates to 4%. This is quite a change from earlier in the year when markets were expecting further interest rate cuts, with growing expectations that the Bank could now need to raise rates again if inflation remains a problem. This has provided some support for Sterling, however concerns around the UK economy and government finances have prevented the Pound from making any real progress against the Euro in recent weeks. Across Europe, the Euro has also remained fairly well supported over the past couple of weeks. Inflation has become a concern again across the Eurozone, particularly with higher energy prices, and expectations around ECB’s interest rate decision have also changed. This has left Sterling under some pressure against the Euro, with the pound giving back some of its gains we saw during the summer when Sterling hit a yearly high on the Euro in July.
Elsewhere, Sterling had a mixed week against the US Dollar, coming under pressure on Friday following stronger than expected US jobs figures. The figures increased expectations that the Federal Reserve could raise interest rates later this month, which initially strengthened the Dollar, although the Pound did recover some of those losses towards the end of the week. Looking ahead, US inflation figures on Friday will be closely watched and could cause further movement for GBP/USD, particularly if they change expectations around what the Federal Reserve may do with interest rates.
Looking ahead to this week
Looking ahead to this week, a lot of the data coming from the EU, starting today with GDP at 10am, the main focus though will be on the European Central Bank’s interest rate decision on Thursday. Markets are widely expecting the ECB to raise interest rates by 0.25%, so attention will also be on what is said afterwards and whether further rises could follow. We also have the latest Eurozone inflation figures earlier in the day, which could create some movement for the Euro ahead of the announcement. For Sterling, the main release comes on Friday with the latest UK economic growth figures. The UK economy is expected to have shown little to no growth during July, so anything significantly better or worse than expected could create some movement for the Pound. Over in the US, we have producer inflation figures on Thursday followed by the more important US inflation figures on Friday. These will be closely watched following the recent change in expectations around US interest rates and could create some movement for Sterling/Dollar With plenty of data due towards the end of the week, we could see a bit more movement for both GBP/EUR and GBP/USD after a relatively quiet start to the week.
Key data this week:
Monday
- 10am – EU – GDP
Tuesday
- UK Retail Sales
- Eurozone Trade Balance
Thursday
- European Inflation
- ECB Interest Rate Decision & Press Conference
- US Producer Price Inflation
- US Jobless Claims
Friday
- UK GDP
- UK Industrial & Manufacturing Production
- UK Consumer Inflation Expectations
- US Inflation
- US Consumer Sentiment