USD Weaker Off High Inflation

By Simon Eastman

We have been rangebound this week again on sterling/euro as little is happening to affect the rates. The pound is still riding high off the fact we carry on without further restrictions, through the Omicron Covid wave, regardless of the continuing high numbers of daily cases and increasing hospital admissions, which markets count as a positive factor. Coupled with the expectation the Bank of England will be hiking interest rates again next month and the pound is at some of the best rates since 2016 against the single currency!

As we mention interest rates, we must look across the pond to the US of A which had its latest inflation reading on Wednesday. It came out at a staggering 7 percent, due to the after effects of the pandemic, much like we are seeing in the UK, but to a greater degree.

This would normally lead to a stronger currency, as markets would price in the need for an interest rate hike to help curb the surging inflation rate, yet with 3 rate hikes already priced in ahead of the inflation release, markets didn’t have much to price in further, resulting in a weaker US dollar instead. Sterling has gained around 6 cents in the last 4 weeks against the greenback, gaining another half cent yesterday.

Those with a dollar requirement in the coming weeks might be prudent to take advantage of the current rates just in case the large increase reverts back, should the Fed announce further measures to curb the high inflation.

Today we have the main data releases for the week for the UK, with GDP, trade balance, industrial and manufacturing production figures. Christine Lagarde, the European Central Bank’s President gives a speech at 13.15, followed closely by US retail sales and finally at 15.00 the Michigan consumer sentiment index rounds off the week.

We expect a UK interest rate rise in February as mentioned, but its worth noting, we expected one in November and it didn’t happen, resulting in a big sterling sell off. With that in mind and the pound at multi year highs against the euro and favourable levels against the dollar and a basket of other currency pairs, it could be worth getting a trade in now, in case history repeats. Contact one of the team today for some friendly guidance on your specific currency needs.