Pound to euro rate surges to fresh 20-month high

The pound rallied against the euro during yesterday’s trading to a fresh 20-month high, reaching 1.1900 on the interbank market before closing the day at 1.1870. In recent days, the pound has gained support from the prospect of an early interest rate rise by the Bank of England. Markets had priced in a hike of 0.15% to the current 0.10% level for early next year, but inflationary worries have brought forward the likelihood of that rise to November’s meeting next week.

UK inflation fell by 0.1 percent to 3.1 percent for the month of September (MoM) although this number is still significantly higher that the bank’s annual 2 percent target. The marginally lower than expected figure can be attributed to inflationary pressures within the supply chain and the fact that price pressures have not yet been passed on to consumers as businesses look to hold out for as long as possible. However, many of these costs will soon hit consumers as businesses will have no choice but to pass on the price increases.

A rise in interest rates makes the UK a more attractive proposition to overseas investors and as such, money flows into sterling increase, thus increasing the strength of the UK currency. However, the possibility of an interest rate hike is not the only reason for the pound’s rise. The pound is closely linked to stock market performance and with equities rising yesterday due to improved market sentiment, the pound was one of the stronger majors.

Another reassuring sign for the UK government and sterling investors is the fall in Covid-19 cases. Once again, the doomsters forecasts in respect of daily Covid-19 infections and hospitalisations have failed to materialise, raising hope that the winter months may not be as difficult as initially feared. Lower Covid-19 cases and the prospect of the economy continuing to open will support the UK currency.

Euro under pressure as ECB doves resist calls for 2021 rate hike

The European Central Bank is also considering the prospect of an interest rate hike, although crucially not until 2022. However, there is market pressure for the ECB to increase interest rates from the current zero percent level, but it is likely ECB doves will push back. Thursday’s meeting is likely to be “more of the same” as the ECB fails to recognise inflationary pressures and gives little insight to when a change in monetary policy may come into effect.

The ECB has previously noted that they see inflation as a short-to-medium term issue that will resolve itself in due course although the ECB will be concerned, even if not expressed openly. Back in 2011 ECB president Jean-Claude Trichet famously increased Europe’s interest rate in two successive quarters, from 1 percent to 1.5 percent during the height of the debt crisis, only for rates to be slashed a matter of months later when the economy was squeezed.

Currently, money markets are factoring a rise of 10 basis points in late 2022 and 30 basis points over 2 years. It is difficult to see any change in this forecast although the ECB will be mindful that market concern is leading to higher financing levels in the Eurozone.

The ECB will also be looking towards their newfound friend (Russia!), which hopes to begin operating energy supplies via the contentious Nordic Stream 2 pipeline later this year. This will of course, ease energy supply pressures in the Eurozone, although cosying up to Vladimir Putin will likely come with risk, but for now the EU seems happy to ignore this.

US economic activity expected to show pick-up

Economic growth in the US eased sharply as the Delta variant impacted consumer spending and businesses were squeezed by supply chain issues. However, there are already signs that economic conditions are improving, and economists are predicting annualised growth of 3.2 percent this Thursday. This compares to 6.7 percent growth for the last quarter.

As the Delta variant caused havoc across the US, consumer confidence suffered, and consumers spent less. Inflationary rises in food, petrol and house prices made consumers wary. That said, the US appears to have turned a corner with Retail Sales data above expectations for September, wages increasing, and more citizens returning to work.

On the political front, confidence in President Biden is diminishing as just 41 percent of the public approve of the president’s performance, against 52 percent who disapprove. Biden’s handling of the pandemic has been questionable, and American’s biggest concern is now inflation and supply shortages.

The president has dropped from a positive 3 points in the July survey to a negative 11 points. 47 percent of Americans now believe there will be a recession within the next 12 months as many now anticipate a worsening of the economy. This will be of concern to the Democrats who were elected based on economic stability and handling of the pandemic.

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