GBP EUR rates sit near a 20-month high on interest rate speculation

Covid-19 remains a concern for most and will often be found in the media. The concerns are mounting and conversation intensifying around the prospect of more restrictions to be introduced in the UK to steam cases. This is of economic interest as depending on these restrictions it could impact growth and therefore the value in the Pound, so it remains a topic of interest.

In the UK last week there were a recorded 328,287 COVID-19 cases which is an increase of 9.4% on the previous week. Reviewing the case numbers against population number this translates to an average of 695 new cases per 1m population each day. As a comparison this equivalent data for other countries shows as US (219), Germany (172), France (77), Italy (52), Australia (85), Ireland (413). Hospitalisation’s data is a week behind, in the week to 19 October these in the UK were at 6,720, up 19.9% on the previous week.

Prevention options are also coming to combat these climbing numbers, Pfizer-BioNTech announced that a third booster dose of their vaccine cut the risk of catching COVID-19 by 95.6% compared to those who had only received two doses.

Political concerns mount around the English Channel and fishing rights. Recently a British trawler has been seized by France and another has been fined, amid an escalating row over post-Brexit fishing rights.

Economically, recently the UK inflation rate dipped from 3.2% in the 12 months to August to 3.1% in the 12 months to September. The Bank of England (BOE) chief economist Huw Pill said that UK inflation will likely rise “close to or even slightly above 5 per cent” as he said that the vote for an interest rate hike next month was “live”.

The next meeting from the BOE is next week and there have been growing speculation that the bank may well act. It is this speculation which has been widely supporting Sterling’s value which recently reached a 20-month high against the single currency. Next week if the BOE does confirm what has been priced into the market, rates could well climb. However, if they miss the expectation which has been factored into Sterling’s value in the build-up, we could well see the cost of buying foreign currency with the Pound fall.

The BOE event next week is one of the largest economical events of the month, central banks normally shy away from making policy changes in the month of December so this could be the last event from the bank for the year. As a result, if you have a currency exposure over the coming weeks, please ensure you are in discussion with your dedicated broker here at Lumon who your eyes and ears on the market can be.

US Dollar could weaken to end the week on speculation consumer spending is dropping

The USD has also been climbing in value of late against the single currency. This again is around speculation that the Federal Reserve (FED) may change policy before the Eurozone. Currently GBPUSD rates sit near to a 6-week high and within 2 cents from the highest level since June.

Economical estimates from surveys of purchasing managers suggest an acceleration of economy activity in the US in October driven by the services sector. This would be represented and confirmed in the economic data released over the coming weeks as we enter the next monthly cycle of economic data. Elsewhere, US industrial output declined for a second month, falling by 1.3% from August to September due to supply chain disruption and Hurricane Ida. The US economy recently was confirmed as expanded at an annualised rate of just 2% in the three months to September, this being down from 6.7% in the previous quarter and raising pressure on President Biden.

The next meeting by the FED is expected to discuss reducing the stimulus program in a similar way that the Bank of Canada confirmed this week. This is a topic that many are expecting to come from the central banks at some point in the future. The chair of the FED has commented before about it being time to slow down the amount of financial support of the US economy referred to as tapering.

This afternoon we also have several US data releases including initial personal spending and consumption expectations. These are expected to show a contraction which could well weaken the USD as we end the week making it cheaper to buy, as predicted by FX Street.

EURO – ECB makes no change to policy as inflation continues to climb

Yesterday we had the latest update from the European Central Bank (ECB). They kept interest rates unchanged which is a different tone than that from the FED and the BOE.

What was not confirmed was whether the central bank will change its own asset buying processes. Originally the bank had allocated a potential €1.85 trillion and so far, €1.46 trillion has gone to bond purchases. The aim of this program from the bank is to keep long-term interest rates low to stimulate the economy.

“We see scope for the ECB to continue its pushback against current market pricing in its communications at the meeting,” quoted a senior European economist at BNP Paribas.

The euro zone economy is currently facing several challenges. This includes supply chain bottlenecks following COVID lockdowns and stop starts within industry.These have created shortages which in turn are pushing up prices of goods. Adding to this, gas prices are at record highs.

Later today we have European inflation data released which is expected to show a climb to 4%. This would further suggest and confirm the struggles within the eurozone which could in turn weaken the euro. The ‘other side of the coin’ however, is that if inflation climbs higher, it will add pressure on the ECB to act which in turn could strengthen the EURO, so this afternoons release remains very important for those clients with a EURO exposure in the coming weeks.

Currently, the market is pricing in a first-rate hike by the central bank at the end of 2022, well behind that of the FED and the BOE.

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).