Currency Note

Pound falls as markets rethink rates rumours

By Chris Nye November 2nd, 2021

The pound has taken fright since Halloween, slipping by well over 0.5% since early on 1st November. It’s a signal that the currency markets are rowing back on optimism about a hawkish Bank of England approach to monetary stimulus at Thursday’s interest-rate-setting meeting.

With global leaders meeting in Glasgow, diplomacy appears to be in short supply, with leaders falling out over the AUKUS defence pact and Channel fishing, as well as the usual COP26 negotiations.

For the currency markets the bigger issue is interest rates, with both the US Federal Reserve FOMC and the Bank of England’s MPC making decisions on interest rates this week.

So far, the general mood appears to be that the Bank of England is looking less likely to raise rates early and The Fed more likely. However, worth noting that these are all just rumours and supposition until the announcements on Thursday and Wednesday respectively.

Elsewhere in the business news, manufacturers continue to be hit by supply chain problems across the world’s major economies, raising prices in response. In the UK, diesel prices hit their highest rates ever, beating 2012’s record of £147.93 by a penny on Sunday.

European stock markets and the FTSE have hit their highest levels since the pandemic started.

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GBP: Pound loses early October’s shine

The pound has suffered a reversal in fortunes over the past 24 hours as the markets begin to rethink their optimism over an interest rate rise on Thursday.

It has lost the gains it made against the euro and US dollar and returns to its lowest since mid-October.

Yesterday on the data front we had a final reading for Manufacturing PMI, slightly better at 57.8. While there are no major data releases today, and the Bank of England’s rate setters are staying silent ahead of Thursday’s decision, the markets may take fright if the fisheries dispute worsens.

GBP/USD past year

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EUR: Euro gains on most currencies

The euro strengthened against its major peers yesterday, by nearly 0.5% against USD and GBP and by over 1% against the Australian dollar.

There was little fresh data yesterday, but retail sales in Germany fell markedly in September, by 2.5% against an expectation of 0.5% rise. Non-foods were the main issue, falling by 5%.

There are final readings for September’s PMI today across the eurozone and tomorrow we will see unemployment in the eurozone too, amid a flurry of speeches by ECB interest rate setters including Christine Lagarde.

USD: Dollar strengthens as FOMC ponders

The dollar held firm yesterday as worsening inflation worries pushed the case for raising interest rates. Over the past week it has strengthened by almost 1% against both the pound and Japanese yen (indeed, strengthening during the past month against the latter to its highest rate for five years). USD fell slightly against the euro, returning to where it began October.

It was a mixed day for data yesterday. ISM Manufacturing PMI came in slightly above expectations but below last month at 60.8, with supply constraints again the issue. It’s a quiet day today so the markets will be looking ahead to tomorrow’s decision from the Federal Reserve, monetary policy committee, the FOMC.

The FOMC will announce its interest rate decision at 7pm UK time tomorrow, against a background of inflation rising at 4.4%. While exchange rates are not expected to rise until next year, stimulus measures are widely anticipated to begin being tapered.

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