Senior Currency Broker
T: 01442 892 062
It was looking to be another quiet day on the currency markets yesterday morning, with the pound remaining within a tight range against both the US dollar and the euro, despite the release of UK inflation numbers, the most closely watched of the ecostats of late.
The figures came out as expected and had little impact on the strength of the UK currency. However, the pound made decent gains against both the euro and the US dollar yesterday afternoon, following a contentious tweet by Donald Trump, in which he appeared to threaten North Korea.
The pound subsequently benefitted from safe-haven flows, with investors favouring the UK currency over the euro and the US dollar.
The graphs below show GBP/EUR and GBP/USD movement over the last 24 hours.
GBP/EUR exchange rate graph
GBP/USD exchange rate graph
The Office for National Statistics said yesterday morning that inflation, as measured by the Consumer Prices Index, had remained at 2.3%, in line with most analysts’ expectations. Reduced air fares over the Easter period had helped keep inflation in check, although food prices are now 1.2% higher than they were this time last year, the biggest annual rise in three years. The news had little impact on the strength of the UK currency as the pound remained flat against both the US dollar and the single currency.
Inflation numbers have been closely watched since the EU referendum last June as the subsequent weakness in the pound has had a significant impact on prices. Much of what we consume is imported and the weakness in sterling has therefore made those imports more expensive, driving up prices. As a result, inflation is now above the Bank of England’s target rate of 2%. Under normal circumstances a central bank would look to raise interest rates to curb inflation, but the Bank of England are apprehensive about tightening monetary policy as wage growth continues to lag behind inflation, meaning real incomes are actually falling. If the Bank of England were to raise interest rates, the household debt burden would increase and consumers would be squeezed even further. As Britain’s economy is driven by consumer spending, the BoE need to be careful over the timing of the interest rate rise as reducing consumers’ disposable income is likely to have a detrimental effect on the UK’s economic growth. Inflation numbers, coupled with wage growth figures, have therefore become the most closely watched ecostat releases over recent months.
The figures released yesterday morning had little impact on the currency markets and we feared we may be in for another exceptionally dull day, after an uneventful Monday, in which the pound stayed flat against the other major currencies. However, that all changed yesterday afternoon and sterling ended the day around 0.7% higher against its two main counterparts, the euro and the US dollar. The surge in the pound appears to have been caused by a controversial tweet by US president Donald Trump, in which he warned that ‘North Korea is looking for trouble’.
The tweet caused concern amongst investors who subsequently moved into the pound, seeking a safer asset, favouring sterling over the euro as uncertainty over the outcome of the French elections continues to weigh heavily on the single currency. Although the pound has been weak recently, the Brexit risk appears to have been fully priced in and sterling is benefitting as a safer alternative to some of the other major currencies, as geopolitical risk seems now to be the main determinant of a currency’s strength. With this in mind, we may actually see the pound strengthen further if Donald Trump continues on this path, which he almost certainly will. Following the tweet, GBP/EUR rose into the high 1.17’s and GBP/USD climbed in the high 1.24’s.
Political and economic uncertainty will continue to move the currency markets and, with this in mind, it is more important than ever to stay in touch with your account manager at Foremost Currency Group. If you don’t already have an account, you can register for one for free by following this link.
Today could prove to be another interest day for the pound as we have the release of a raft of data from the UK this morning, including unemployment numbers and wage growth figures. We also have a speech from BoE governor Mark Carney, so we should expect some volatility in sterling crosses.
Senior Currency Broker
T: 01442 892 062