Sterling exchange rates struggling following BoE

Sterling exchange rates struggling following BoE

Pound Sterling exchange rates have struggled this week following the Bank of England’s decision to keep interest rates unchanged at 5.25%.

Governor Andrew Bailey sited the continued drop in UK inflation and the UK’s weakening economic performance as the key reasons to keep rates unchanged. Interest rate rises help ease inflation by increasing the cost of borrowing. However, higher interest rates can cause economic growth to stifle.

Bailey did leave the door open for further interest rate rises this year. Future rises will be data dependent. This means UK inflation data will be key for sterling’s rates. Another uptick in inflation could see the pound rise based off interest rate expectations.

This morning inflation data released in Spain confirmed a drop in inflation. Later today we will see inflation data from Germany before readings from France, Italy, and the wider eurozone is released tomorrow.

The ECB kept interest rates unchanged at their last meeting. A drop off in Eurozone inflation would further support this decision and could cause euro weakness moving forward. EURUSD is trading close to a 9-month low.

US GDP and Jobs data is released this afternoon which could move the markets. A strong showing would support another interest rate rise. Last week, Fed chair Jerome Powell left the door open for further rises depending on data. US inflation is well above the 2% target set by the Fed but lower than levels in the UK and EU.

The dollar index which measures the strength of the dollar against a basket of currencies is at the highest since December. Inflation data could cause another spike.

In the morning UK GDP data is expected to reveal a small year-on-year growth of 0.4%. A lower-than-expected reading could cause further bad news for the pound.

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