020 7898 0500
Inflation rose as expected 3.1% in August ahead of the Bank's decision.
Surging fuel costs pushed UK inflation up to 3.1% in August, the highest level in five months. Core inflation, which does not include more volatile goods such as food and petrol, was unchanged at 2.6%, indicating domestic price pressures remained more or less stable. Despite this more positive angle, the news still piles additional pressure on the Bank of England ahead of tomorrow’s interest rate decision.
The pound was seen slightly lower this morning against the euro and the US dollar, although currency movements have been fairly small to start the week. That is likely to change today as we enter a busy period for central bank meetings, beginning tonight in Washington D.C.
All eyes are on the US dollar today ahead of one of the most consequential Federal Reserve decisions in recent times. With inflation up and treasury yields testing post-financial crisis highs, currency markets expect the first hike since 2023. The general unease that has gripped markets to start September adds another complicated variable.
Speaking of which, government borrowing costs remained stubbornly high across developed economies on Tuesday, driven mainly by higher inflation expectations and the energy crisis. European gas prices are this morning at their highest since the end of 2022 and the crucial brent crude oil index sits near a four-month high.
Thanks to the magic of the Triple Lock, some of Britain’s pensioners could have found themselves paying income tax next year. That’s because the 3.9% rise in average earnings (the highest of the three factors that determine the annual increase in pension payouts) has dragged the value of the state pension north of £13,000, and therefore above the tax-free income allowance. However, the government confirmed yesterday that they would not need to pay tax on these earnings, increasing speculation that it might look to address fiscal drag in the autumn Budget.
The debate around AI development rumbled on yesterday. The CEO of Anthropic again pleaded for a pause in development of so-called frontier models, which some worry could spiral out of control or be hijacked by rogue states. Both Donald Trump and Chinese government officials have waved away these concerns.
GBP: Productivity up, employees down
While the headline unemployment rate steadied in Britain, digging a little deeper into earnings and payroll data revealed things weren’t all rosy. The number of payrolled employees was down by over 100,000 from a year earlier, a fact that weighed on the pound and perhaps might give the Bank of England pause before its decision tomorrow lunchtime. Still, the UK economy is doing more with fewer workers, a positive signal that it is last generating real productivity growth.GBP/USD: the past year
EUR: Consumers still anxious
The German ZEW economic sentiment survey crawled up a couple of points in September, improving for the fourth consecutive month but coming in below market expectations. For the euro, tepid growth in its dominant economy could be a barrier to long-term success, even if respondents pointed to tentative tail winds like government stimulus and export incentives.GBP/EUR: the past year
USD: Showdown in Washington
Kevin Warsh's credibility is on the line tonight. Just four months into his tenure as Fed chair, bond markets are in something of a revoult over inflationary pressures and the fiscal trajectory. The US dollar could well be volatile as we count down to the decision and the crucial press conference that will accompany it.USD/GBP: 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 3918 7255 or your Private Client account manager on 020 7898 0541.
