020 7898 0500
It has been a challenging week for anyone hoping the pound would keep its strength. And last night, the pressure came from an unexpected direction.
Minutes from the US Federal Reserve’s January meeting showed that some officials were not just debating when to cut interest rates – they were discussing whether to raise them. That caught markets off guard and gave the dollar a fresh lift overnight.
For the pound, this adds to what has already been a bruising few days. UK unemployment hit a five-year high of 5.2% on Tuesday. Inflation dropped to 3% on Wednesday. Both numbers point toward the Bank of England cutting rates at its March meeting, and markets now treat that as close to a done deal.
The problem for sterling is straightforward. When a central bank looks ready to cut and another is talking about doing the opposite, money tends to flow toward the higher-yielding currency. That is exactly what we are seeing.
The pound is on track for its biggest weekly fall against the euro since December. Thursday has been calmer, but the drift lower has not reversed. Gilt yields have dropped to their lowest level in over a month – a clear sign that the bond market sees a cut coming too.
The euro has its own story this week. Reports surfaced suggesting ECB President Christine Lagarde may leave before her term ends next year. The bank denied it, but the euro still dipped against the dollar on the back of the speculation.
So we have three central banks pulling in three different directions. The Bank of England looks set to cut, the ECB is holding firm, and parts of the Fed are openly weighing whether rates need to go higher. That divergence is what is driving this week’s moves.
All eyes now turn to Friday. UK retail sales and business activity data land alongside a key US inflation reading – the personal consumption expenditures (PCE) report. Those numbers will go a long way toward deciding whether this week’s trends have further to run. You can protect your business from these fluctuations today by using tools like a forward contract – just call your account manager on 020 3918 7255 to discuss your options.
GBP: Pound faces pressure
The pound opened near its lowest level of the year against the euro this morning, as cooling inflation increases the likelihood of a Bank of England rate cut in March. While the market has stabilised today, the currency remains fundamentally weak ahead of tomorrow’s retail and business activity reports. Against the dollar, sterling has slipped as the global focus shifts toward a resurgence in US currency strength.
GBP/USD: the past year
EUR: Euro holding steady
The euro has maintained a solid position against the pound this week, though it has struggled to keep pace with a surging US dollar. Despite brief volatility caused by rumours of leadership changes at the central bank, the ECB’s “steady as she goes” policy is currently providing a firm floor for the currency. Investors are now looking to today’s European consumer confidence update for the next signal on the Eurozone’s economic health.
GBP/EUR: the past year
USD: Fed hawks lift dollar
The dollar has emerged as the week’s strongest performer after the Federal Reserve indicated that the era of high interest rates may not be over. This hawkish surprise has pushed US borrowing costs upward and solidified the dollar’s lead against most major peers. The rally faces its next major test on Friday with the release of the “PCE” report, the US government’s preferred gauge for measuring inflation.
EUR/USD: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 7898 0500 or your Private Client Account Manager on 020 7898 0541.
