Sterling continued to break new records for 2023 against the euro yesterday, although it ended the day unchanged overall. Against the US dollar it managed to hold onto its gains and ended the day close to 1% up.
The driver of sterling versus the euro and dollar has been the differing paths that inflation is taking. In Europe the rate of price increases is falling, with core inflation dropping to 5.3% – below expectations – and suggesting that the European Central Bank (ECB) can now end its interest rate rises.
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In the UK inflation remains stubbornly high, meaning that interest rates will likely continue to rise. That boosted bond yields in the UK compared to the eurozone too. Good news for investors, if not mortgagees, sending capital into the UK and strengthening the pound.
However, ECB chief Christine Lagarde poured cold water on the idea that inflation is defeated, saying: “We need to continue our hiking cycle until we are sufficiently confident that inflation is on track to return to our target,” which strengthened the euro in later trading yesterday.
Various interest-rate setters in the US have, however, indicated that rises can be paused, which sent the dollar into a tailspin.
In business news, the US debt ceiling crisis appears to be waning, with legislation to raise government borrowing and avoid a government default apparently about to be signed with just days to spare. However, while the US’s credit rating appears to be safe, France’s credit rating could be downgraded due to the claimed weakness in its public finances. The French government is in discussion with S&P, the ratings agency, to avoid a downgrade, and they will have been cheered by positive industrial output data this morning.
A new post-Brexit disagreement has arisen between Brussels and London. UK car exporters face paying 10% trade tariffs from January due to ‘rules of origin’ terms and the lack of battery supply from within the UK. Brussels wants the UK to join the Pan-Euro-Mediterranean (PEM) agreement to solve the problem, while the UK wants the EU to suspend the new levy until 2027 to allow time to build up its battery capacity. UK exporters in other industries, says the FT, are hoping that joining the PEM would help them too.
Yesterday the former US Treasury Secretary told the BBC that “Brexit will be remembered as a historic economic error that has reduced the competitiveness of the UK economy, put downward pressure on the pound and upward pressure on prices… All of which contributed to higher inflation.”
The UK faces another train strike today, the 29th day of action over the past year.
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