The Tortoise or the Hare?

By Matthew Boyle

Friday saw Sterling drop significantly, losing 1.5% against the Euro and 2% against the Dollar. It was an ECB announcement of a 50bp hike to interest rates that started the drop in GBP rates and sparked a sell -off across most of the market. What caused rates to drop so significantly was ECB President Christine Lagarde warning that numerous interest rate hikes would be required to bring Eurozone inflation down to the target of 2%, but why did this damage the Pound so much?

Whilst the target has always been 2% Lagarde’s comments indicated a clear shift in ECB policy to a much more aggressive and hawkish stance. Significantly the BoE have of course raised several times since last December whilst until only a few months ago the ECB hadn’t raised rates in the previous 10 years. So, it seems as the BoE are taking their foot off the gas the ECB are putting their foot down. A more accurate description would be imagine a race where the BoE started early running at a controlled pace whilst the ECB who almost seemed left behind have gone from a walk and now broken into a sprint. Who will win – the tortoise or the hare?

Lagarde’s comments certainly caught the market’s attention and with it highly sentiment driven the initial in drop GBP rates that followed the hike became magnified. This pivot in stance by the ECB is very significant as it marks a clear shift in sentiment, not only from the ECB itself but the wider market and as such could be the start of a downward spiral in GBP rates.

With the cost-of-living crisis full impact yet to be seen and UK recession looming it becomes increasingly tough to see how the Pound will recover. And with little data of note this week and the Christmas break will the downward trend continue into the new year when the Pound will have to brave unemployment and retail sales figures released. Undoubtedly there are significant hurdles ahead for the Pound.

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