The British Pound is losing value to the Dollar and Euro at the start of the new week with investors continuing to sell in the wake of the Bank of England’s cautious rate hike and amidst an ongoing backdrop of deteriorating global investor sentiment.
Sterling plummeted last week after the Bank raised interest rates by a further 25 basis points but warned that the UK economic outlook had deteriorated significantly.
The Bank of England (BoE) hiked interest rates by 0.25% to 1% on Thursday, in line with market expectations, but warned that inflation may hit double-digits in Q3 and that growth may turn negative in 2023. This double-dose of bad news sent an already weak British Pound tumbling lower with any minor rebounds being sold again.
The Monetary Policy Committee, on Thursday, highlighted the risks the UK economy faces in the months ahead, opining that rampant inflation had caused a material deterioration in the UK growth outlook. The Bank of England is trapped between a rock and a hard place in trying to reduce price pressures by hiking rates while keeping the economy stimulated to prevent stagflation.
Last Thursday’s candid assessment from the Bank of England (BoE) of the difficulties likely lurking ahead for the UK economy and their constraining implications for the interest rate outlook have been the dominant drivers of Sterling’s declines although the Dollar did itself also rally.
“Wednesday’s FOMC meeting and Friday’s US employment report were arguably net negative for the greenback, as they reduced hawkish tail risks around mid-year funds rate pricing,” says Zach Pandl, co-head of global foreign exchange strategy at Goldman Sachs.
“But even if Fed-related fears have eased on the margin, investors are still faced with downside risks to European economies from the war in Ukraine, and to the Chinese economy from weaker-than-expected policy support” Pandl and colleagues also said in a Friday research briefing.
The British Pound approaches the weekend attempting to recover some of the significant losses against the Euro, Dollar and other currencies that came after the Bank of England painted a bleak picture of the economic outlook.
The Bank of England surprised markets with the sheer gloom of the economic forecasts published in its Monetary Policy Report, and some currency analysts say this could ensure the British Pound remains on the back foot for some time to come.
“The outlook for the pound will remain grim just like the GDP forecasts provided by the BoE today,” says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG.
The Pound to Euro exchange rate plunged to a low of 1.17 but has since recored to 1.1740, while the Pound to Dollar exchange rate hit a low of 1.2325 before staging a recovery to 1.2365.
The Bank of England has indicated in the past that it estimates a 10% depreciation of the Sterling Trade Weighted Index boosts the headline rate of CPI inflation in two years’ time by 0.75% and 2.75% after four years.
“Sterling weakness is adding to the dilemma facing the Bank of England as it attempts to fight rising UK inflation without hurting Britain’s economy too much in the process,” says Robert Howard, a Reuters market analyst.
The Pound-Euro exchange rate fell 1.44% on Thursday alone, for the month of May it has lost 2.0%. The Pound-Dollar exchange rate is facing a more dire loss of 4.30% already for May.
The Bank of England currently forecasts inflation to peak close to 10% later in 2022, this figure would have to be revised higher were the Pound to fall and all other conditions remain equal.
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