Currency Note

Pound tumbles following Bank of England interest rate hike

By Alex Bennett May 6th, 2022

The pound has tumbled against the euro and the dollar following the Bank of England’s decision to raise interest rates by just 0.25% yesterday.

Markets had priced in a larger rate hike, so the minimal increase caused major losses for sterling, which has fallen by over 1% against the euro and over 2% against the dollar.

Yesterday also saw local elections take place across the UK. While many areas are still awaiting results, early results show that the Conservatives have lost control of several key London councils, including Westminster, Barnet and Wandsworth.

Today, the main focus will be the US non-farm payrolls. This follows yesterday’s initial jobless claims figures, which came in higher than expected, and will give a further indication of how the American economy is faring.

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GBP: Pound falls 2% against the dollar

The pound has slumped against both the euro and the dollar following the Bank of England’s decision to raise interest rates from 0.75% to 1%, the highest rate since 2009.

Sterling suffered following the announcement, falling over 1% against the euro and over 2% against the dollar, as markets reacted to the lower-than-expected hike. The pound was previously trading artificially high due to speculation of a 0.5% hike, so the 0.25% hike came as a disappointment.

Interest rates are hiked to tackle inflation, which policymakers from the BoE warn could rise above 10% in the coming months.

GBP/USD chart over past year

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EUR: ECB preparing for sequence of interest rate hikes

The euro has strengthened around 1% against the pound but has erased its gains against the dollar.

The single currency is largely being driven by other currencies following the interest rate decisions of both the Bank of England and the Federal Reserve.

Speaking yesterday, European Central Bank official, Philip Lane, said that the Bank is preparing for a sequence of rate hikes as eurozone inflation stands at a record high of 7.5%.

“I think it’s clear that at some point we’re going to be moving rates, not just once, but over time, in a sequence,” Lane told the Bruegel think tank. “When exactly will that start?… It should not be seen as the most important issue.”

Industrial production figures for Germany shrank 3.9% month-on-month in March, far below market expectations of a 1% drop and the biggest decline since April 2020.

USD: Dollar strengthens ahead of non-farm payrolls

The dollar has recovered the losses it suffered following the Federal Reserve’s decision to raise interest rates on Wednesday, the biggest hike since 2000.

The greenback has strengthened by around 1% against the euro and 2% against the pound following news that the Bank of England has also decided to raise interest rates, albeit by less than anticipated.

In the data world, initial jobless claims – the number of Americans filing for unemployment benefits – rose by 9,000 last week. Markets will now be keeping an eye on today’s non-farm payrolls and unemployment figures for a further indication of how the US economy and labour market are faring.

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