By Simon Eastman
Tuesday saw the pound trade within a tight range against its major pairings as little data was released and the markets awaited the UK inflation reading this morning.
The only data releases of note yesterday started early with German producer price index, but despite a lower number, the Euro didn’t react initially on its release, although on the EU market open at 8am, it did weaken slightly.
The day was full of speeches by European Central Bank members Schnabel, Cipollone and Knot, the Bank of England’s Huw Pill and the FED’s Barkin, Hammack, Musalem and Kugler all speaking from the G7 meeting, where the US, UK, Japan, Germany, France, Italy and Canada are meeting this week to discuss economic policy.
With little to go off, apart from cautious words from the G7 on economic stability, traders hung onto the US Moody’s downgrade, leaving the USD slightly weaker against the Pound and Euro over the day’s trade. For Sterling/Euro, the pair traded in a 20-pip range for most of the day ahead of this morning’s release of UK inflation.
Forecasts expected the inflation reading to jump dramatically from 2.6% to 3.3% year on year, and from 0.3% up to 1.1% for the month. With the Bank of England targeted to keep inflation at the 2% mark, such a jump would raise questions over their recent policy and could cause the Pound some issues over the day.
The actual reading came out higher than expected, with the year-on-year consumer price index rising to 3.5% and the monthly 1.2%. Core CPI, which excludes the volatile food and energy prices, also rose more than expected, up to 3.8%. At the time of writing, as the European markets are just opening, the Pound is moving downwards, dropping nearly half a cent against the Dollar, although its worth keeping a close eye on the market over the morning, as higher inflation could indicate it’s less likely the BoE will cut interest rates again, and we could see the Pound benefit, providing some attractive buying opportunities.
Interest rate tinkering is the way banks control inflation, with interest rate hikes used to tackle high inflation and interest rate cuts used against low inflation. Raising interest rates makes borrowing more expensive so in theory curbs spending, reducing inflation. Cutting interest rates should have the opposite effect, so the concern here will be the Bank of England have cut rates too rapidly and consumers are once again borrowing and are spending too much, raising inflation away from their target. We must also consider the cost-of-living crisis we find ourselves in, with everything costing more and more – do consumers have any choice but to borrow and spend more, in turn leading to inflation rising and the cost of goods increasing further? It’s a tricky situation and the reason why the BoE, Fed and ECB have all kept a “suck it and see” approach to their monetary policy thus far, keeping their cards close to their chests when questioned about future policy.
The other main event today is the European Central Bank’s financial stability review, which is released around 9am and gives insight into potential sources of risk and financial instability for the Eurozone. This will be one to watch for any Euro buyers out there if the single currency comes under fire. In the meantime, for those looking to buy that dream Place in the Sun, navigating the currency markets is ever challenging. We have seen Sterling move up and down multiple cents against the Euro and similar against the US Dollar in the last 6 weeks, making thousands of Pounds difference to the cost of that dream home abroad. With such uncertainty, and whilst the going is currently good for those with sterling in hand, it may be prudent to speak to one of the team sooner rather than later about locking in the exchange rate in for your upcoming requirement. Whether it be a forward contract or a limit/stop loss order that might work best for you, call for some friendly guidance and let’s make your money go further.