The pound weakened against most of its main pairs 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 as commodity backed currencies the Norwegian krone and Australian dollar weakened by even more, 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.
Two opposing views are on display on the subject. Alan Taylor, one of the nine BoE interest-rate setters, highlighted the risk that the UK economy faces a hard landing in its efforts to cut inflation. He said they should cut interest rates.
But he was effectively contradicted by an International Monetary Fund (IMF) report that the UK will actually be one of the fastest growing major economies next year, and its focus should remain on beating inflation. Objectively, you might think that the IMF’s views would carry more weight than Taylor’s, but they don’t have a vote at the next BoE meeting on 6th November.
The US dollar was also hit overnight by the same issue, this time a more dovish tone from US Federal Reserve chair Jerome Powell, who noted that “the downside risks to employment have risen” and interest rates may be cut again next month in response.
Also influencing the market, the Economic Sentiment Index from the Centre for European Economic Research (ZEW) improved for Germany – albeit rather insipidly and less than the markets expected. But it shrank to its least optimistic for five months for the eurozone as a whole. This was blamed on the ongoing budget dispute in France.
In business news, the IMF also warned – following the BoE last week – that risks of a global financial crisis are higher, due to AI (artificial intelligence) stocks which they say look overvalued – much like the disastrous dot.com bubble of the 90s.
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