Jonathan Watson
November 5, 2021

Bank of England disappoints markets yet again

The pound is weaker today following a sharp drop in value after the surprise decision yesterday by the Bank of England to keep interest rates on hold at 0.1%. Wrong footing some of the most seasoned analysts in the currency markets, the pound was sold off as investors readjusted their positions to this news.

The pound dropped 1.2% from against the Euro and 1.6% against the US dollar as the lack of any hike made the pound less attractive for investors to hold. There was lots of positive language around the need for a hike ahead but the Bank has ultimately disappointed the market.

You can argue this weakness for sterling is good news for any clients selling a foreign currency to buy sterling, since if the longer-term predictions are that the Bank of England will raise interest rates, that would in economic theory strengthen the pound ahead.

And for clients looking to buy a foreign currency with the pound, the current levels whilst lower than the recent highs represent a big improvement from the lows of the last two years, with GBPEUR interbank rates at 1.1675 still 7 cents higher than the start of the year, and 12 cents higher than the 1.05 lows of last year. For GBPUSD levels, the 2020 lows were 1.16 so we are still 20 cents above this with current interbank rates at 1.35.

Why didn’t the Bank of England hike and what next for the pound?

The Minutes for yesterday’s decision indicate that the MPC (Monetary Policy Committee) was waiting for ‘more information’ on the effects of the ending of the furlough scheme, and to see if the pressure on household incomes from rising inflation would lead to lower spending and demand in the economy.

The next Bank of England meeting is December 16th although historically it is often said that central banks shy away from making such changes around Christmas periods to try and keep markets calm and soothed into the New Year.

According to data from Reuters, Refinitiv, there is now a 40.6% chance of a December hike, with an 89.7% chance of a hike in February, the next date of the next meeting after December’s. The debate however around this hot topic looks unlikely to go away anytime soon therefore, and with so might we continue to expect volatility for the pound.

If you have any transactions involving the pound ahead it might be worth keeping in close contact with your account manager here who can keep you informed of the latest news as we can see from yesterday that interest rate changes have big potential to induce currency volatility.

Euro strengthens against weaker pound but loses to the US dollar

The Euro has, as we finish the week, had a mixed performance with a fall against the stronger US dollar but has risen against the weaker pound. The Euro is now trading against sterling at a one-month high on the interbank rate.

GBPEUR levels tested lows of 1.1675 at the time of writing, down 2.25 cents from the highs of 1.19 last week. At 1.19 that means 1 euro would be buying 84 pence, but this week at the better points 1 euro would now buy 85.6 pence, all according to the interbank rates.

Selling €250,000 today would generate an extra £4,000 compared to the lows of last week.

The importance of interest rate expectations has therefore been underlined this week with the pound losing ground against the Euro as the interest rate likelihood for the UK was scaled back, whilst for the US it was upgraded.

Only this week Christine Lagarde, President of the ECB confirmed this expectation, where she stated the ECB were ‘very unlikely’ to raise rates in 2022, as reported in the press. According to Reuters, markets had been betting that the first ECB rate hike could come in October 2022 but Lagarde’s comments are at odds with this.

Aside from the clear gains made against sterling this week, the Euro is still on the whole weaker against many currencies because of this proposition with the UK and US both expected to raise interest rates either this year or in 2022. For more information on the Euro outlook ahead and what might drive sentiment please speak to your account manager.

US Federal Reserve also holds off on interest rate hikes but confirms taper

The US Dollar has ended the week stronger as the Federal Reserve is proceeding with a taper of their QE program, although it announced it would be holding off on an interest rate hike.

The news was greeted positively by the currency markets on Wednesday evening which has seen the US Dollar gaining in value as investors position themselves for a stronger US currency ahead, should the expected interest rate hikes and scaling back of QE continue.

QE (Quantitative Easing) refers to the monetary support that was provided to the US economy by the Federal Reserve in the face of the COVID pandemic last year. The ‘taper’ is the name given to the gentle withdrawal of this support and is typically seen as positive for the currency concerned.

The advance for the US dollar against sterling was reinforced even further yesterday with the news the UK would not be proceeding with an interest hike as planned this month. GBPUSD levels have dropped the best part of 3 cents since Wednesday, as US monetary policy edges forward whilst UK monetary policy remains in neutral.

Current interbank rates on GBPUSD are 1.3507 so selling 250,000 USD today for sterling would get £4,200 extra compared to Wednesday. Whilst the dollar did reach better levels against sterling in September at 1.3248, we would have to go back to January to get to a better time this year for selling the dollar against the pound.

What will move US dollar exchange rates today?

Today is a key date for the US dollar with the release of the latest Non-Farm Payroll Report and Unemployment report. Such data is usually monitored very closely, particularly with the Fed getting closer to raising interest rates.

With the report detailing the monthly change in non-agricultural employment, it provides a very healthy snapshot of the US economy and is a key barometer of economic activity at present as markets seek to better understand just how the US is recovering from the pandemic, and how this will shape monetary policy ahead, not just for the US but also for the wider world.

Expectations today for NFPR are for 425k new jobs to have been created in October, versus the 194k in September. By nature, the data is hard to forecast so there are often big variances in the numbers which can lead to additional volatility for the US dollar.

The US dollar accounts for around 60% of globally traded FX so big news like today can influence not just the American dollar, but also many other currency pairings including the pound, the Euro and Australian dollar as well.

For more news on how this release might influence your exchange rate and transfer ahead please speak to your account manager or one of our expert team today.

This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).