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The Bank of England raised interest rates yesterday
The pound received another boost yesterday as the Bank of England raised interest rates for the first time in more than three years. Sterling strengthened against the euro following the announcement, helped by a surprisingly hawkish message from policymakers.
The quarter-point rise, taking UK interest rates to 4%, was widely expected. What caught the market’s attention was the suggestion that more increases could follow. Eight members of the Bank’s Monetary Policy Committee backed the decision, while the ninth wanted an even bigger rise. Governor Andrew Bailey warned that another increase could be needed if inflation remains stubbornly high.
That might sound like good news for the pound, but the catch is that the Bank now expects UK inflation to approach 5% next year, largely because of the continuing conflict in the Middle East and its impact on energy prices. Higher interest rates can make sterling more attractive, but they also mean households face a longer squeeze on their finances. It could also be another blow to the British housing sector, which is clearly in the doldrums. On Wednesday Savills predicted a price fall of 1.5% in 2027, while yesterday’s S&P Construction survey showed the sharpest contraction in months.
Across the Atlantic, markets are still digesting the Democrats’ sweeping victory in Tuesday’s US midterm elections. Oil prices have fallen sharply this week as investors hope the result could encourage Donald Trump to seek an end to the conflict with Iran. That has helped ease some inflation concerns and taken some of the shine off the US dollar.
For anyone keeping an eye on exchange rates ahead of an international transfer, it’s been quite a week. Sterling’s recent strength against the euro has been particularly striking, although the next move will depend on whether the Bank’s warnings turn into further action. With energy prices and political developments still capable of changing the picture quickly, there’s plenty for currency markets to consider.
GBP: A hawkish surprise gives the pound a lift
Sterling strengthened against the euro following yesterday's interest rate announcement. The question now is how much further the Bank will go. Policymakers remain concerned that rising energy bills could eventually push up wages and other prices, and we will be hearing from the Bank's chief economist Huw Pill at lunchtime today. The highlight of next week will be the latest quarterly Gross Domestic Product (GDP) numbers, to be released on Thursday.GBP/USD: the past year
EUR: Inflation keeps the pressure on Europe
The euro has its own inflation headache. Figures released this week showed prices across the eurozone rising by 4% annually in October, up from 3.8% in September. Energy costs were once again the biggest culprit, leaving European households facing much the same squeeze as those in Britain. We will be getting Europe's retail sales data shortly, but have to wait another week or so for anything more meaty.GBP/EUR: the past year
USD: Dollar looks to Payrolls for support
The dollar gained overnight against most currencies as fallout from the midterms continued. But doubts remain – will Trump double down on the Iran war or seek to disengage? A sustained decline in energy prices could give the Federal Reserve more room to consider lower interest rates further down the line. Coming up today, Non-Farm Payrolls and unemployment, and on Tuesday we'll get inflation.USD/GBP: the past year
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