Currency Note

Bailey: “We are in very unusual times”

By Christopher Nye May 12th, 2023

The Bank of England (William Barton /

Following a positive morning the pound sank yesterday afternoon, despite the Bank of England both raising interest rates for the twelfth time in a row, and upgrading its growth forecast by the largest amount in the Monetary Policy Committee’s 26-year history.

Sterling ended the day around a third of a percent down against the euro, having strengthened to a fresh 2023 high earlier in the day. Against the US dollar the pound fell by nearly 1%.

After yesterday’s interest rate rise, this morning we have heard the UK’s latest GDP figure, which showed that the economy grew by 0.1% in the first quarter of 2023. While the 0.3% drop in March was larger than expected, it was explained away by the wettest March for decades, plus several strikes.

Yesterday the Bank of England upwardly revised both its inflation prediction (it will stay higher for longer) and its growth forecast. It has dropped its prediction of a recession and now expects the economy to be 2.25% larger in three years’ time than it had been predicting, with lower unemployment expectations too.

Speaking of forecasts going awry, the new Quarterly Forecast from Smart Currency has predictions for major exchange rates per quarter for the next year, as well as expert analysis. Download your copy.

While the good news on the economy was welcome, Bank of England governor Andrew Bailey nevertheless faced hostile question over the persistently high food inflation and the effect on households of both that and yet another interest rate rise. He rejected the notion that food sellers were overcharging, pointing out that energy is a big part of food costs and producers have understandably bought supplies in advance due to issues arising from the war in Ukraine. “But, as we said before, we are in very unusual times,” he said.

Make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract; call your Business Trader on 020 3918 7255 to get started.

GBP: Pound remains strong despite afternoon dip

Sterling has reached the end of the week slightly up on the start of the week, having attained its strongest position against the euro for four months early yesterday.

While those gains were pared back in the afternoon session, GBP/EUR has settled at almost 1% up on last month. It’s held onto similar gains against the dollar over the month, despite a resurgent greenback in the past few days.

After GDP today, the high level data continues next week with unemployment on Tuesday and then Gfk Consumer Confidence on Thursday. With the Bank yesterday predicting a much smaller rise in unemployment than previously expected, the markets will be interested to see the first test of this prediction.

GBP/USD past year

From To


EUR: Euro moves in different directions

A mixed day for the single currency saw it weakening sharply against USD, again, continuing to lose the strong gains of the past month. While the drop was less pronounced than the calamitous 2% drop of Monday, there is no sign of it recovering those losses just yet.

On the plus side for some, the euro gained against sterling.

Today we’ll see final readings for inflation in several European countries. The recent sharp falls in inflation in Spain and France appeared to have stopped in the flash reading, so it will be interesting to see the final result.

The first big event of next week for the euro should be the ZEW Economic Sentiment Index for Germany. The largest economy in Europe has been slower to recover than some others post-pandemic, and last month the index declined well below market expectations. Signs of a recovery could boost the euro, and vice versa.

There will also be final readings for inflation in some euro economies.

USD: Dollar powers ahead as inflation steadies

The dollar had a strong day, gaining around 1% against the pound, overall, and Australia’s dollar and Canada’s ‘loonie’. There was a smaller gain against the euro.

The prompt for the dollar’s strength has been weaker economic data from the US, plus steadying inflation, that is likely to persuade the US Federal Reserve to pause its interest rate increases.

Yesterday’s Producer Price Index (PPI) measure of inflation was roughly as expected. Later today we’ll hear the Michigan Consumer Sentiment index.

For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business trader on 020 3918 7255 or your Private Client trader on 020 7898 0541.