Sterling under pressure as UK outlook becomes cloudy

By Lauren Buckner

Sterling hit a fresh 19 month high last week versus the Euro as expectations of an interest rate rise by the Bank of England before year end continued to increase. Due to recent inflationary pressures in the UK it is currently believed that we will see around a 100 basis point increase between now and the end of 2022 and that the first rate rise could happen as early as next month with recent consumer price inflation sitting at 3.1% , well above the Bank of England’s 2% target.

Although the Pound’s value has been bolstered by predictions there is a rippling undercurrent of fear that the Bank of England could be forced to act too soon and that they may be forced to reverse hikes within a two year period. Although an interest rate hike is linked to a strengthening currency, fears that this could be unwound within a two year period could be counter-intuitive and see pressure on the value of the Pound.  This has meant that many strategists have switched from sterling bearish to more neutral over recent days – they believe that the Pound is fair value at its current rate and does not have much potential for further strength – something our Euro buyers should take note of.

Economic pressures elsewhere for the UK are increasingly challenging with rapidly increasing covid cases, Brexit talks with Northern Ireland threatening to escalate, ever-increasing energy prices, the end of the furlough scheme, withdrawal of additional state benefits an upcoming tax hike all providing a melting pot of pressure for the Pound which is a reminder for us all of the challenges to come in the UK.

Rishi Sunak’s budget on Wednesday may provide very little surprises as many policy’s made the headlines over the weekend. As Sunak begins his ‘post-pandemic’ rebuild of the UK economy the NHS is expected to benefit from an increase in spending of £6 billion, a transport spend of £7billion to ‘level up’ transport outside of London and further increases in investment in Children and Family centres to name just a few.

Unfortunately for the Chancellor however, focus here around the budget is seemingly being overlooked as concerns rise around the current number of UK covid cases and whether we will need to increase restrictions and move to Plan B. Plan B will see the reintroduction of masks in public places and a renewed plea for us to work from home in an attempt to stem the virus’s transmission. This is another concern for the value of GBP as the reintroduction of covid restrictions could stagnate our economic recovery and see the Pound weaken.

In good news UK travel continues to increase and once again become more flexible. The cost of travel had been higher over recent months with expensive PCR tests required for many destinations. However, from  yesterday this has been scrapped and replaced with a much cheaper lateral flow test on your second day of return to the UK and no requirement for a pre-departure test for vaccinated travellers. Please do let us know if you plan to travel over the coming weeks to view property overseas and begin your search for a holiday home, your friendly account manager can keep you up to date with any twists in the market which could impact your budget.

The week ahead

A relatively quiet first half to the week before a very busy Thursday.

Main event – ECB Interest rate decision and accompanying press conference

Additional data; EU services sentiment, consumer confidence, industrial confidence and business climate.

US GDP and initial jobless claims