How Will BoE React to Energy Crisis Fears?
The Pound weakened significantly against its major currency counterparts yesterday, as investors moved their funds out of the Pound and into ‘safe haven’ currencies such as the US Dollar, Swiss Franc, Japanese Yen, and Euro, which all gained throughout yesterday. GBP/EUR Interbank levels fell to over a 2-month low to 1.1594, whilst GBP/USD rate fell to an 8-month low of 1.3537, as concerns mounted that UK inflation could continue to rise amidst a global energy crisis.
The demand for fuel globally, and as such the surge in energy prices, has raised the likelihood of high inflation levels for an extended period, and central banks globally including the Bank of England, could be forced into raising interest rates to try to balance this. Andrew Bailey, Governor of the Bank of England, suggested earlier this week that an interest rate hike in 2022 was more likely, due to rising fuel prices and higher transport costs pushing prices up as we head towards Christmas. Inflation currently stands at 3.2% and is heading above 4% in the last quarter of this year – twice the BoE’s target rate, with inflationary pressures worsening.
Up to 90% of fuel stations in major UK cities ran dry yesterday, as panic buying caused further problems to the supply chain crisis caused by a shortage of HGV drivers. The UK Government had announced plans to issue 5,000 short-term visas so that foreign drivers can ease the problem, however, this offer is not proving to be a particularly popular offer amongst European lorry drivers. The Road Haulage Association estimates the shortage of drivers to be by around 100,000. We could see further Sterling weakness if the situation worsens over the coming days, therefore if you have upcoming requirements involving the pound you may wish to keep an eye on developments or contact your Account Manager at Lumon who can keep you informed.
Another key release that could cause movement for Sterling exchange rates, is GDP (Gross Domestic Product) figures for Quarter 2 which will be released on Thursday morning. The expectation is for this figure to fall significantly from 4.8% in the first quarter, to -1.5%, whilst the year-on-year figure is expected to remain the same at 22.2%.
The Euro made some impressive gains against the Pound yesterday, with GBP/EUR interbank levels hitting a 2-month low of 1.1594. The ongoing supply chain and fuel shortages in the UK yesterday was a key driver for the volatility, however, added pressure came from Germany’s Consumer Confidence figures which surprised economists by reaching a 19-month high. The German GfK Consumer Climate indicator was expected to fall from -1.1 to -1.6, which would have been its third decline in a row, however instead this was released at 0.3, the best level and only positive score noted since before the pandemic.
The European Central Bank’s President, Christine Lagarde, spoke yesterday suggesting that the central bank should continue to keep monetary policy loose whilst not overreacting to temporary spikes in prices, to ensure that Inflation levels return to target. Lagarde noted that the current price hikes were mostly attributed to the reopening of the economy, but that the ECB now needs to “exit the pandemic safely and bring inflation sustainably back to 2 percent”.
This morning, Industrial Confidence and Consumer Confidence figures will be released for September, along with Business Climate figures. All are expected to fall slightly compared to the previous month, except Consumer Confidence is expected to remain at -4. However, if this morning’s releases surprise economists as the German figures did yesterday, we could see further gains for Euro exchange rates.
The US Dollar has continued to strengthen against its major currency pairings yesterday, benefiting from its safe-haven status, as the energy crisis continues to hit economies globally. Gas shortages in Europe and power outages in China caused by limited coal supply is halting factory production, which could, in turn, cause a slowdown in global growth. US treasury yields have continued to climb, pushing US Dollar rates higher after the Federal Reserve signaled at its latest interest rate meeting that it would begin to taper its bond-buying programme.
US Consumer Confidence figures were released yesterday and unexpectedly weakened in September as COVID-19 cases continued to soar, in turn furthering concerns about the US economy’s short term forecasts. The index fell from 115.2 in August, to 109.3 in September, which was the third consecutive decline and the lowest reading seen since February. This however did little to stop the US Dollar from reaching 2-month highs against the Pound yesterday.
Tomorrow will see the release of key data sets including Initial and Continuing Jobless Claims, along with Gross Domestic Product (GDP) for the second quarter of 2021. The annualised GDP reading is expected to remain at 6.6%, however, any deviations from this figure could cause further volatility for USD exchange rates. The ongoing fuel shortages in the UK will also likely be a key driver to determining Cable rates this week, therefore clients with an upcoming currency exchange to make, involving the US Dollar may wish to discuss these with their Account Manager at Lumon.
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).