Currency Note

15-year interest rate high leaves sterling unmoved

By Christopher Nye August 4th, 2023

After initially falling, sterling recovered almost across the board yesterday after the Bank of England (BoE) opted to raise interest rates by the lower of the likely degrees, 25 basis points rather than 50.

However, this still raised interest rates to 5.25%, their highest for 15 years, and the Bank also warned that they would stay high, despite falling inflation. BoE governor Andrew Bailey said: “to get inflation back to target, we are going to have to keep this stance of policy.”

There were demonstrations in Threadneedle Street at the effect on households, while the thinktank the IPPR complained that the Bank was “overdoing it”. However, the chancellor Jeremy Hunt was supportive of the rise.

While this means the government potentially going into an election with rates still high, prime minister Rishi Sunak may derive comfort from the Bank also saying that inflation should half by the end of the year, fulfilling one of his 2023 pledges.

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Back to currencies, and on the data front yesterday final results for July’s PMI results came in largely as expected. The eurozone’s services PMI was marginally downgraded, but still remains positive at 50.9.

Germany’s balance of trade in June stood at its highest since the start of 2021, as imports declined by 3.4%. There has been light at the end of the tunnel for German businesses this morning, with factory orders rising unexpectedly by 7% between May and June. Over the past three months factory orders have risen at their fastest since June 2020.

In business news, retail behemoths Amazon and Apple both recorded strong growth, with Amazon predicting third quarter sales 9-13% above last year, and Apple recording record growth in service sales (even though iPhone sales fell).

In the week that much of Europe departs for les grandes vacances, the FT reports that hedge funds have lost $6bn short selling Airbnb and US cruise lines Carnival and Royal Caribbean. The global public continued to spend on their holidays, confounding efforts to profit from their demise. It was also revealed that the jump in France’s last quarterly GDP was largely caused by the sale of one new cruise ship, the 331-metre-long MSC Euribia, for €1 billion, from its yard in Saint-Nazaire.

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GBP: Sterling recovers mid-day losses

Sterling dropped sharply before and immediately after the interest rate decision at 12 noon yesterday. However, while the 25 basis point rise may have been seen as relatively dovish, the BoE’s subsequent comments about keeping rates high were not, and GBP recovered to end the day where it started.

The MPC’s decision was a split vote, with two of the nine-member panel voting for a 0.50% rise and only one for no change.

Next week we will hear house price data from the Halifax on Monday morning. Will they follow the Nationwide’s findings of the sharpest falls for decades?

GBP/USD past year

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EUR: A positive week for eurozone economy

The single currency ended the day edging higher against the pound and US dollar. Taking the past month as a whole, EUR is around half a per cent stronger against GBP and USD, but having undergone a 3-4% swing over the month.

No great surprises from the purchasing managers index (PMI) data this week, but the eurozone can be satisfied with a week in which inflation fell and GDP grew (except in Italy).

This morning there has been unexpectedly positive news on German factory orders, which are powering upwards.

USD: Labour data will offer clues to US economy

A quiet day for the US dollar ended with no overall movement apart from against the yen, where the dollar weakened by around 0.6%.

Yesterday’s data included ISM Services PMI, which declined from last month, to 52.7.

On Tuesday JOLTs Job Openings indicated a tightening labour market, and we will see this afternoon if that is confirmed by non-farm payrolls.

Next week starts quietly for data, but livens up considerably with inflation on Thursday.

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