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Governor Bailey's comments struck a positive tone on the UK's outlook
The pound fell to near its lowest point against the euro since the beginning of the year yesterday, at one point down by almost 1% since last week. Sterling later recovered to finish almost unchanged against the euro and GBP/USD rose by 0.5%. The euro meanwhile advanced by a similar margin against the US dollar.
Bank of England governor Andrew Bailey said on Tuesday there were “encouraging signs” that price pressures were easing across the UK economy. Bailey could not be drawn on when he thought rates would be cut, but markets are now predicting there to be at least three rounds of cuts over the course of 2024.
Particularly interesting were Bailey’s comments that the Bank may begin reducing interest rates before inflation hit the 2% target. While not totally surprising from a practical point of view (the impact of interest rates on the economy is notoriously slow to appear), it was somewhat surprising to hear him speak with such conviction.
“We don’t need inflation to come back to target before we cut interest rates,” Bailey said. “I must be very clear on that, that’s not necessary.” Central bankers are usually masters of saying nothing at all, even going as far as to deliberate obscure their intentions to put the brakes on excitable markets. It was a nice change to hear some concrete opinions from a policymaker.
Things are on the move in the UK, and all this just weeks before the government is due to deliver the budget. That is one event we’ve really got our eye on and we believe you should too. Multiple political channels have suggested Jeremy Hunt might reduce taxes, yet his room for manoeuvre is very slight indeed. The UK is now fully aware of the chaos that budget announcements (or mini-budgets) can cause, so it’s always important to be aware of the risk to your upcoming transactions. It’s one to watch leading up to 6th March.
Collective wage growth in the eurozone slowed for the first time in 18 months over the last quarter of 2023. Negotiated worker pay rose by 4.5% in that period, compared to 4.7% in the previous quarter. Commentators were quick to point out that these figures were still very high and would be unlikely to force the European Central Bank’s hand in cutting interest rates.
The White House has announced it plans “major sanction” against Russia in retaliation to the death of opposition leader Alexei Navalny. According to a government spokesperson, the sanctions will hold Putin to account for the war in Ukraine as well as recent actions against his critics.
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 account manager on 020 3918 7255 to get started.
GBP: A short recession
Andrew Bailey stole the headlines yesterday for his comments on interest rates and inflation, but he also made some interesting remarks about economic growth. Bailey predicted that the UK’s recession would be a short one, and that a fall in inflation would rapidly feed into a pickup in economic activity.
GBP/USD: the past year
EUR: Von der Leyen targets second term
Ursula von der Leyen announced on Monday that she will be seeking a second term as president of the European Commission. Political figures and their appointments tend to have tangible effects on exchange rates, so her campaign will be one to watch for euro buyers.
GBP/EUR: the past year
USD: Biden’s war chest
Just as Donald Trump is forced to sell trainers to raise funds, Joe Biden had a record month for donations. The incumbent’s war chest now sits at $130mn, the largest amount raised by a Democrat at this stage of a campaign cycle.
USD/EUR: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 7898 0500 or your Private Client Account Manager on 020 7898 0541.
