The Pound has continued to strengthen against its major currency pairings throughout the course of this week, with GBP/EUR Interbank levels reaching 1.1862 yesterday, the highest level since February 2020. UK Inflation figures for September, in the form of Consumer Price Index, were released yesterday at 3.1%, just below the 3.2% noted in August which had been predicted by economists to remain in September. However, this slowing of Inflation did little to change any predictions of the Bank of England raising Interest Rates later this year, with many investors now predicting a rate hike could take place after the banks next policy meeting on 4th November. Sterling has benefitted from further suggestions towards a rise in interest rates this week, as this would make it a more attractive, higher yielding investment.
Inflation has now risen over 3% for two months in a row and is expected to continue in an upwards direction potentially reaching 4% by the end of the year. This is more likely taking into account the recent hikes in energy prices UK households are now faced with. The Bank of England’s inflation target is 2%, and last month said it expected inflation to rise above 4% in the final quarter of 2021, before the energy crisis was realised.
This month’s data from the ONS (Office for National Statistics) backs the suggestion that further inflationary pressure could be on the way.
However, one factor which could stop Sterling’s rally in its tracks is the increase in Covid-19 cases seen in the UK. Tuesday saw the highest number of covid related deaths in the UK since March. Senior medical figures warned yesterday of hospitals being ‘on the edge’, despite the UK Government resisting the re-introduction of Covid measures. As the vaccine rollout has stalled, now behind several other European countries, and a slow uptake on the booster programme, the UK could face a difficult winter ahead, although there are currently no proposed plans for further lockdowns.
Looking tomorrow, we’ll see UK Retail Sales figures released which are expected to rise from -0.9% in August to 0.5% in September, although the year-on-year figure is expected to fall compared to the previous period. Markit Manufacturing and services PMI data will be released later in the morning and are also expected to fall, so we could see continued volatility for GBP exchange rates over the coming days.
European Inflation figures, in the form of Consumer Price Index, were released yesterday morning for September. The month-on-month figure showed a slight rise from 0.4% to 0.5%, and the year-on-year reading remained at 3.4%. In stark contrast to the UK’s outlook on the current issue of rising inflation, the IMF European department Director Alfred Kammer told a news briefing yesterday that Europe shouldn’t see an inflation spiral, as climbing energy prices are expected to settle next year, with some slack in the labour market. Kammer said “the high inflation which we are seeing right now is really driven by…an increase in energy prices, and we expect that to fade out during 2022”.
It was announced yesterday that European Central Bank policymaker Jens Weidmann will be stepping down as Governor of Bundesbank, the German Central bank, on 31st December – five years earlier than expected. Weidmann has been a ‘relentless critic’ of the ECB’s policies, and his resignation may pave the way for a less confrontational successor to be selected by Germany’s new Government, likely a coalition led by the current finance minister, Olaf Scholz. The change may mean an easier monetary policy over the coming years.
We could see further movement for EUR exchange rates later this week, as on Friday, Markit will release October’s Manufacturing and Services PMI (Purchasing Managers Index) for Germany and the Eurozone as a whole. It’s expected that we’ll see slight contractions across the board, however anything too far outside of expectation could create swings on the Euros value.
The US Dollar has continued to struggle against its currency counterparts, following from weak US Industrial Production data, and housing and building data earlier this week. As risk appetite has recovered, Investors have been moving funds away from the ‘safe haven’ US Dollar, and into potentially higher yielding currencies such as the Pound. With the increasing prospect of the Bank of England raising Interest Rates on November 4th, this has caused investors to move their funds into Sterling and other currencies with higher interest rates for a greater potential return on investment.
This afternoon sees the release of Initial and Jobless claims data for the week, with initial claims expected to rise from 293k to 300k, and continuing claims expected to fall slightly to 2.55m. The Philadelphia Fed Manufacturing survey for October will also be released and is expected to see a fall from 30.7 to 25. Get in touch with us today to find out about how these releases could impact any upcoming US Dollar transfers.
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