Anyone who made a trade from pounds to euros or US dollars, or locked in the rate, last Wednesday will have been feeling pretty smug by Thursday afternoon.
Sterling’s interesting start to February saw it hit a near five-year high on the US dollar and six-month high against the euro on Wednesday. It then drifted by some 2% against USD and just over 1% against EUR.That has continued this morning.
Could it drift further? There is no guarantee either way, but while it is still close to recent highs, why not call your account manager on 020 8003 4915 and discuss locking the rate in?
The pound’s sudden fall was caused by two things, neither of which look like resolving themselves in a positive way for sterling. Firstly, the Bank of England (BoE) surprised the markets by very nearly cutting interest rates – the vote was 5-4 – thereby signalling that they are more likely to cut next month. Secondly, there is the continuing risk that yet another prime minister could be forced out within only a couple of years of taking office, with all the uncertainty that brings. The likelihood that it would be a more overtly left-wing replacement prime minister may be worrying the market too.
Arguably, that eventuality has moved a step closer with the resignation of Keir Starmer’s chief of staff over the weekend. We will see what the markets make of that today.
Last week’s data was almost non-existent on the UK side, although house prices rebounded by 0.7% in January according to the Halifax, above £300,000 for the first time. However, the Bank of England predicted that inflation will go below 2% very soon, and that will encourage interest rate cuts and a boost to the market (if not the pound).
On the US side, the labour market is struggling, raising the argument for interest rate cuts. We will hear more of that on Wednesday, so watch out for the US dollar. The likely next chair at the US Federal Reserve suggested that an AI-induced productivity boom would allow for interest rate cuts. However, a poll of economists poured cold water on this idea.
For Europe, inflation has already slipped below 2%. Another boost for those retiring to the eurozone with a triple-locked UK pension!
