Currency Note

Sterling under pressure post interest rate hike

By Roseanne Bradley August 7th, 2023

The pound starts the week 0.65% down on the euro and 0.8% down against the US dollar

The pound looked like it would end Friday close to a five-week low against the US dollar, but it was boosted in the latter half of the day following weaker-than-expected non-farm payroll data for July. More on that below.

Against the euro, the pound has lost 0.65% since this time last Monday, mainly in the aftermath of the Bank of England’s interest rate hike on Thursday which affirmed the current monetary policy stance is “restrictive.”

Euro area retail sales fell unexpectedly at the tail end of last week, losing 0.3% from a month earlier in June 2023, following a revised 0.6% rise in May. This missed market expectations of a 0.3% increase.

The US economy added 187,000 jobs in July, lower than the 200,000 forecast, and following a downwardly revised 185,000 in June.

UK Construction PMI beat expectations of 48 on Friday, coming in at 51.7 from 48.9 in June. This indicated modest growth for the sector and marked the strongest reading in five months.

On Friday, the US unemployment rate fell to 3.5% in July from 3.6% in June.

Fresh PMI figures revealed that France, Italy and the Eurozone all experienced a large contraction in manufacturing in June and a further slowdown in the services sectors.

World food prices shot up to 123.9 in the three months to July from an upwardly revised 122.4 in June, which marked the lowest reading since April 2021. It’s believed this was largely driven by higher prices for vegetable, sunflower, palm, soy and rapeseed oils, which surged 12.2%.

This week, we’ll receive the latest figures from the Halifax House Price Index in the UK, which is forecast to fall by 0.6% in July. Tuesday and Wednesday are relatively quiet on the data front, while on Thursday, economists will receive core inflation and inflation figures for the US, which are forecast to drop to 4.6% and 2.8%, from 4.8% and 3% in June.

On Friday this week, the morning brings GDP growth data for the UK and later, US PPI and Michigan consumer sentiment figures.

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GBP: A cautious market

Bank of England governor Andrew Bailey said last week that the central bank will keep interest rates “sufficiently restrictive for a sufficient period” to try and return inflation back to 2%, the Bank’s target.

GBP/USD: the past year

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EUR: German industrial output falls

In June, industrial production in Germany dropped by 1.5% month-on-month. This was worse than market expectations of a 0.5% fall and a marginally revised 0.2% decline in May.

USD: Labour market remains strong

The US economy added 187,000 jobs in July. This result was lower than the average monthly gain of 312,000 but remains almost double the 70-100,000 needed to keep up with growth in the working-age population.

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