Is BoE’s Monetary Policy finally working?
GBP
Following the release of UK inflation figures on Wednesday, Sterling dropped against all G10 currencies. Official inflation for June was confirmed at 7.90%, a 3.0% drop compared to market expectations and a 0.80% drop from last month’s figures. These figures are still way above the BoE’s target rate of 2%, however, is the drop in inflation a sign that the BoE’s Monetary Policy is finally working?
Retail sales figures came out better than expected on Friday, increasing by 0.70% MoM vs an expected 0.20% increase, insinuating consumer confidence is picking up thus increasing the chance of a less aggressive rate hike.
Overall consensus has now shifted in the market as to whether the BoE will continue to raise rates at such a sharp pace. BoE will meet next week Thursday to decide what level they raise interest rates to. The expectation was for a 0.50% hike, however the recent drop in inflation data, coupled with strong retail sales means we could see a rise of just 0.25%.
The UK is pretty light on the data front this week with eyes looking towards international data releases from the likes of ECB and the Fed.
EUR
The crucial factor for GBP/EUR this week will be the ECB’s interest rate decision on Thursday. The currency pair is trading around 1.1580 at the time of writing, compared to its 11 month highs at 1.1727 last week, a retracement of around 1.25%.
Should Thursday’s press conference suggest that the interest rate outlook remains unchanged from June, there is a chance of the pair regaining momentum and breaking back through 1.16. However, if the ECB hints at a potential further course of action, Sterling might face further downward pressure.
Both the ECB and BoE are in a somewhat of a similar situation, attempting to aggressively hike interest rates in order to combat high levels of inflation, compared with the US who now appear to have inflation under control. Depending on the outcomes of the central bank meetings over the coming weeks, we could see both Euro and Sterling gain some major ground against the Dollar as we seem to be near the end of the Fed hiking rate hiking cycle.
USD
As predicted, GBP/USD saw a lot of last week’s gains wiped. At the time of writing the currency pair sits around 1.2850 level, down over 2% vs its peak last Friday at 1.3142! This was mainly due to lack of demand for Sterling, due to the weak inflation data in the UK last week.
Disappointing PMIs are keeping expectations of a more aggressive BoE at bay, preventing GBP/USD from gaining the bullish momentum from last week.
Looking ahead to the week, despite low inflation figures, the Fed are still believed to raise interest rates in the US by 0.25% on Wednesday. Should the Fed decide to maintain its current interest rate for another month or suggest that previous forecasts from June are less certain, we could see GBP/USD rally significantly.
If you have an upcoming currency requirement and would like to hear more about what is affecting the markets in the coming weeks, please contact us on 020 3876 5432.