By Matthew Boyle
The FX market opened on Monday with GBP>EUR rates close to the best they have been since mid-December and GBP>USD rates the best they have been in over a month.
Whilst ECB head Christine Lagarde’s aggressive stance on Euro interest rate hikes was enough to stir up some concern for the single currency, it was in fact news of bank bailouts that primarily caused the Pound to rally.
The collapse of US bank SVB and bailout of Swiss bank Credit Suisse not only caused the USD and EUR weaken but bolstered the Pound’s strength as global investors began to eye up the UK as a better bet. The result saw a large amount of the capital flowing out of the US and Europe amidst concern due to serious banking sector stress, to the UK and the Pound. With the UK banking sector seemingly both better managed and without the exposure to fixed securities which is what largely caused the troubles of both SVB and Credit Suisse, the Pound gained and may be well positioned moving forward to benefit from any further USD and EUR losses.
Despite the Pound benefitting from the greenback and single currencies demise, yesterday’s trading highlighted how sensitive the market and exchange rates are currently as GBP rates dropped. A release of UK public net sector borrowing showed UK debt in February had increased by over 15 billion, far more than the expected 7.6 billion. This saw GBP rates begin to slowly fall which continued throughout the day’s trading with earlier recent gains wiped out. By the market close significantly it had lost almost one and a half cents against the Euro.
Today and tomorrow are particularly important for the Pound, Euro and USD with critical central bank data released. The UK and the Pound kicked off early morning with the release of UK inflation data, revealing the shocking news that it is now sat at a whopping 10.4%, rising unexpectedly from the 10.1% it was at and expectation of a shrink to 9.8%.
With high inflation linked to the need for interest rate hikes, and those in turn being positive for currency rates, already this morning we have seen the Pound claw back around half of yesterday’s losses. The question now is not if the BoE are going to raise rates when they meet tomorrow but rather will they hike by 0.25% or 0.5%. A 0.5% hike would likely see a rally from GBP, but with it widely suggested we are more likely to see a hike of 0.25% don’t be surprised if we see rates fall following the market pricing this in after this morning’s inflation figure.
Mid-morning today we see Christine Lagarde speak amidst ongoing concerns for the ECBs own interest rate programme with concerns for potential negative impact after SVB and Credit Suisse demise .
Finally at 18.00 we have the US interest decision and monetary policy statement released where similarly many will hope to see an ease off from the FED and their programme given recent events in the Global banking sector.
With the Bank of England’s interest rate decision then tomorrow these three major currencies go head-to-head over the next few days, so get set for a bumpy ride.
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