UK: Weekly FX Market Update 8 August

GBP

• The Pound lost ground despite an interest rate increase by the Bank of England on Thursday.

• At the time of writing, GBPUSD was down by 1% across the week and GBPEUR had fallen by 0.5%.

• Liz Truss increased her lead in the polls to be the next Prime Minister.

On Thursday, the Bank of England delivered a rate increase of 0.50%, pushing interest rates to 1.75% as expected, the 6th consecutive rate hike the BoE has delivered since December 2021. Despite this being the largest rate jump since 1995, and the highest rates have been since 2008, this was accompanied by a forecast that the annual rate of inflation is set to climb above 13 percent when household energy bills jump higher in October. Were that to happen, it would be the highest level of inflation in 42 years. More bad news then followed, with the Bank expecting Britain to enter a recession in the last quarter of this year that will last through to the end of 2023, with the economy contracting by 1.5% next year. The Bank’s outlook underlines the scale of the potential economic challenges facing the next PM. So far, much of the economic debate has centered on taxes, with Liz Truss, the current front-runner, vowing to quickly cut them for workers and businesses amid a cost of living crisis.

EUR

• The Euro had a quiet week, benefiting 0.50% against the Pound, but falling 0.50% against the Dollar .

• There was a mixed bag of date as Euro zone retail sales disappointed on Wednesday when they fell by 1.2% month on month .

• However, there was good news in the form of German industrial production which unexpectedly grow by 0.4% on Friday.

USD

• The USD gained across the week with the main data point being the Non-Farm payrolls on Friday. This beat expectations with 528k new jobs added against a forecast of 250k.

• More good news followed with the unemployment rate dropping to 3.5%.

• It was also a busy week for soundbites from FOMC members.

  • Fed Daly was interviewed and said the Fed’s work on inflation is “nowhere near almost done” and also said she was “puzzled” by the market pricing rate cuts.

  • Fed Evans said he sees rates at 3.25-3.50% by the end of year, basically in line with market pricing, but he also expects a further 2-3 rate hikes of 0.25% next year.

  • Fed Mester rounded out the hawkish tone by nailing home the Fed’s main goal is to get inflation under control, even if it means below trend growth this year and next.

RoW

• On Tuesday, the Reserve Bank of Australia (RBA) board maintained the pace of policy normalisation with another 0.50% hike to take the cash rate to 1.85%. This is the third 0.50% hike in as many months.