Sterling Bulls Charge Ahead– Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

The pound had another strong and steady performance throughout this week, with GBP/USD moving comfortably above 1.2800 for the first time since April of last year. GBP/EUR also traded above 1.1700 for a spell, a level not witnessed since August. Much of the rally could be attributed to worries over surging UK wage growth and its potential to impact accelerating inflation, which fed through to rapidly increasing market bets on the chances of further rate hikes by the BoE. To that end, markets now expect around 1.25% of further rate hikes by the BoE, as they continue to battle persistent UK inflation. Gilt yields subsequently rallied to levels last seen in the Truss/Kwarteng era.

Next week’s BoE meeting therefore looks nailed-on for another 25bps hike. However, the interesting part may be Andrew Bailey’s comments to see whether he pushes back on those recent market-implied rate hike increases. That seems unlikely if we take his recent comments into consideration, with Bailey admitting that inflation is taking a ‘lot longer’ than had been hoped to decline. The latest UK inflation report is released just a day before the BoE meeting, with headline inflation expected to have moderated only slightly on an annual basis from 8.7 to 8.6% during May. That would not be enough of a decline to please either the UK consumer, or the BoE.

Much the same as elsewhere, UK employment remains particularly tight, and aside from those lofty gains among wages, overall ILO unemployment declined to 3.8%, although the Claimant Count did decline by 13.6K, after the previous month’s 23.4K gains. The latest UK growth data confirmed that GDP accelerated by 0.2% during April, flipping the 0.3% monthly decline previously, and perhaps giving the BoE even more reason to feel confident to hike away. One slight negative was that both Industrial and Manufacturing Production data declined over the past month, with the former slipping by 0.3% and the latter shrinking by 1.9%.

Taking everything into consideration, further gains for the pound could well be forthcoming, assuming all else remains equal.

EUR

As expected, the ECB hiked Euro area rates by a further 0.25% on Thursday, taking the ECB’s main refinancing rate from 3.5 to 3.75% in the process. That marked a 22-year high for European rates. Oh, how time flies. ECB Head, Christine Lagarde, did her best to be as hawkish as possible, confirming that the ECB are likely to hike rates again next month, as they continue to battle persistent inflation throughout the region.

During her post-meeting conflab, Lagarde suggested that (ECB) interest rates will be ‘brought to levels sufficiently restrictive to achieve a timey return of inflation to the 2% medium-term target and will be kept at those levels for as long as is necessary.’

The problem is, not everyone believes the ECB. Why? Well, amongst other negative data, the region has weakening growth, with both Germany and the Region as a whole recently slipping into a recession, softening consumer sentiment and waning manufacturing output. These are not normally the best ingredients to bake a great rate hike cake. Granted, inflation remains persistent, but if the weak economic backdrop persists, Lagarde & Co will need to become ever more creative in justifying those further hikes. Time to bring in Paul Hollywood.

As for the single currency, well EUR/USD basked in the sunny post-Lagarde bullish narrative, surging back over 1.0950 for the first time in over a month. Markets may well gravitate to the key 1.1000 next. EUR/JPY rallied over 153.00, a level not witnessed since 2008.