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Sterling remains rangebound as cost of living continues to climb

Sterling exchange rates remained relatively unchanged throughout yesterday’s trading session, with many GBP pairs continuing to trade around their 52-week highs.

Much of the focus within our daily market reports is on GBP/EUR, and this pair has consolidated very close to the annual high of 1.1932. For the past week the Pound to Euro exchange rate has remained range bound and trading within a cent, with the pair trading between 1.1825 and 1.1925 since the 16 November. The pair are trading towards the low of this range this morning.

One of the driving forces behind the recent bout of Sterling strength is the increased likelihood of an interest rate hike from the Bank of England, which would mean an increase from the current record lows of 0.1%. Conventional wisdom suggests the Pound will climb when the BoE decides to hike interest rates, although often it’s the case that the interest rate hike is already ‘priced in’ when it becomes official owing to hints from BoE representatives. The next hike isn’t quite so clear cut though, and it remains to be seen whether it will take place in December or February so we could see further market movements depending on when the hike is likely to take place.

Increasing inflation rates and the cost of living is increasing the chances of a rate hike sooner rather than later, and yesterday official figures from the Confederation of British Industry showed the biggest retail price rises since May 1990 according to retailers surveyed. This ties in with inflation levels within the UK as a whole hitting a 10-year high according to the most recent reports, and figures such as these increase the likelihood of an interest rate hike.

Interestingly if the BoE decides to make an amendment next month, it would be the first time since 2008 they would have decided to make a rate change in December, and it would be the first time since 1994 that a hike will have been made during December.

Economic data due out of the UK is very light today, but next week the Manufacturing and Services sector will be reported on with the Services sector being key for the UK economy. Do feel free to get in touch if you wish to plan around this release which takes place on Friday the 3 December.

What’s causing the Euro to weaken?

The Euro has continued to lose value against most major currency pairs lately, with the Euro to Pound rate trading around the lowest levels in 1-year. So far this month the Euro has lost around 2.75% against the US Dollar, and through 2021 it’s lost almost 8% against the US Dollar which is often the benchmark currency to compare to.

A resurgence of Covid-19 restrictions from countries such as Austria, the Netherlands, Italy and multiple Eastern European nations has concerned markets and increased the likelihood Eurozone economic output declining. Germany, the powerhouse of the EU is also considering reintroducing lockdown measures which is likely to hit the trading bloc’s economic output to a larger extent.

At the same time the European Central Bank (ECB) has remained bearish despite increasing inflation, which is a worldwide issue at the moment as opposed to being EU specific. Despite this, the bearish tones adopted by ECB members concerning monetary policy contrast with the bullish tones from the likes of the Bank of England for example. It appears that the ECB is loath to make amendments anytime soon which has applied further pressures on the Euros value.

France is considering the reintroduction of face masks and Slovakia, Czech Republic, Netherlands and Hungary all posted record numbers of new Covid-19 cases, so it appears that Europe is once again the epicentre of the pandemic. This negative news is perhaps another reason for Euro weakness recently.

The Euro to Pound exchange rate hasn’t traded below 0.8350 since February 2020, and you would have to go back to 2016 before the pair traded below this benchmark for an extended period of time. Perhaps for the first time since the Brexit vote we could see the pair break below and consolidate below this level. If you’re more familiar with observing the pair using the GBP to EUR pairing, 1.20 is the number to look out for.

Whilst economic data releases out of the Eurozone are very light today, ECB president Christine Lagarde is speaking this morning so any major updates could potentially influence Euro exchange rates.

US Dollar index hit’s 16-month high, is further strength for the US Dollar likely?

The US Dollar has continued to strengthen recently, and this week the US Dollar index has hit its highest level since July of 2020.

The dollar index measures the USD against a basket of major currency pairs, so a high reading demonstrates US Dollar strength relative to other major currencies and on Monday it hit a 16-month high.

The US Dollar has performed strongly this week after US President Joe Biden opted to renominate Fed Reserve Chair Jerome Powell to remain in his position for a second term. Lael Brainard has been nominated for the Vice-Chair position, and the continuity of keeping Powell in his position is considered a positive for the US Dollar due to expectation of the status quo remaining intact. Financial markets also believe Powell is more likely to adopt an aggressive approach to monetary policy and push forward with interest rate hikes. Brainard is considered less aggressive in approach.

This morning the Pound has fallen to its lowest level against the US Dollar in almost 1-year owing to both continued Dollar strength and Sterling weakness. The Pound has lost over 3% against the greenback over the past month and if you wish to target a particular trading level, please feel free to make us aware.

Economic data is very light out of the US today, although this time next week the financial markets will be gearing up for a monthly highlight when US Non-Farm Payrolls will be released. There is often a large emphasis on this release as it covers the number of new jobs in the US on a monthly basis. Clients with an upcoming currency transfer involving the US Dollar have a week to plan around this release, so feel free to make us aware of your plans.

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).