The pound weakened yesterday after the UK’s unemployment rate hit its worst since the pandemic and pay rises eased.
Sterling’s losses were fairly modest at half a cent or so against the euro, and not across the board, but they did wipe out all the gains that GBP/EUR had made since the beginning of the month and returned to a position perilously close to a two-year low.
Although there has been some clawback overnight, the currency markets were selling sterling in reaction to the increased possibility that the Bank of England (BoE) will restart cutting interest rates before year-end, and that risk for sterling remains.
So what’s going on? Mainly, it’s this battle over monetary policy – interest rates – not just in this country but globally. In one corner are the ‘hawks’, dedicated to keeping interest rates high in the effort to beat inflation. In this corner are most of the Bank of England Monetary Policy Committee (MPC), Jerome Powell who is the boss of America’s central bank the Federal Reserve, and the International Monetary Fund (IMF).
On the other side are the ‘doves’, keen to boost business and protect jobs by cutting interest rates. Their standard bearers are President Trump in the USA and a current minority of the MPC in the UK.
If the doves are winning then a country’s currency weakens, and vice versa. Yesterday, following worsening unemployment in both the UK and USA, there were signs that the hawks are being won over to lower interest rates. The pound and then the US dollar fell in response.
In the UK, as well as rising unemployment there were signs that high, inflationary pay rises are being scaled back as job openings become more scarce.
The monetary battle will be continuing this week as more economic evidence emerges. Tomorrow it’s the turn of Gross Domestic Product (GDP, i.e. the size of the UK economy). After flatlining last month, will there be any signs of growth?
More monetary policymakers will also be speaking publicly too, and the currency markets will be listening closely to their comments, all adding up to a turbulent period for exchange rates after months of stability.
Of course, they are all making educated guesses about an economic future that may well turn out to be wrong. For educated guesses directly related to your exchange rate, download our brand-new Quarterly Forecast.
And if you would just like to escape all the talk and lock in your exchange rate for a large upcoming trade, call your account manager on on 020 8003 4915.
