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Gloom over the Bank of England (Sam Tanno / Shutterstock.com)
The interest rate decision from the Bank of England (BoE) yesterday sent the pound in two different directions. Before the vote by the nine members of the BoE’s Monetary Policy Committee (MPC) GBP/EUR strengthened to its best for eight years. However, after the vote, the fact that three of them opted to cut rates, two more than expected, plus warnings over the economy, sent the pound into a tail spin. GBP/USD starts today at its weakest since April.
Against the euro we are still trading at very close to that post-referendum high, reflecting that overall it’s been a mixed week for sterling, with strong gains against NOK, AUD and NZD to set alongside the 1% loss against the US dollar.
The general picture is that the British economy is in trouble but with inflation still high. While leaving interest rates unchanged the BoE cut its forecast to zero growth in the last three months of 2024. It blamed the recent budget, noting “significant uncertainty around how the economy might respond to higher overall costs of employment”.
This morning, we have heard UK retail sales growing by 0.2% in November. This was a sharp rise from the 0.7% drop in October but was less than expected nonetheless.
The US government faces a potential shutdown arising from Congress voting down the Trump-backed funding bill. If a deal is not forthcoming later today some federal workers will be sent home and others’ pay will be suspended. This seems so far not to have hit the US dollar.
In yesterday’s data, Germany’s GfK Consumer Confidence reading improved fractionally but remains deep in negative territory. Japan’s inflation rate rose to 2.9% yesterday, after the Bank of Japan maintained its interest rate at 0.25%, which is where it has been since July.
With little data to come over the next week or so, let’s revisit what happened this week. For the UK, services PMI rise to 51.4 but manufacturing PMI fell to 47.3 (anything over 50 denotes general optimism and under 50 pessimism), average earnings stayed at 5.2%, double the rate of inflation, which rose to an annual rate of 2.6%.
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GBP: Testing times for sterling
Sterling weakened by around 1% against the US dollar yesterday and a little less against the euro. However, for GBP/EUR this was after briefly hitting a new post-Brexit high. After a heavy week of data this week, that continues next week with a final result for GDP on Monday.
GBP/USD past year
EUR: Mixed week for euro
It has been a mixed week for the single currency, with strong gains against the Norwegian krone and antipodean dollars but further losses (1.3%) against the US dollar. There is very little data coming out of Europe today and for the rest of the year, but we will get a reading for consumer confidence in the eurozone this afternoon. It is expected to have worsened.
EUR/USD past year
USD: Dollar’s gains continue
A remarkable week for the US dollar has seen it strengthen against every other major currency by as much as almost 3%. One of the smaller gains – just 1% – was against sterling. This afternoon we will get the core PCE price index, which is a highly influential measure of underlying inflation.
USD/GBP past year
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