Will the pound continue to fall? Sterling exchange rates hit multi-month lows

Sterling finished the trading week on the back foot, closing out at 1.1480 against the Euro a four-month low since 15th May.

Unfortunately, against the dollar it was a similar story with the week closing out at 1.2235 against the Dollar a six-month low dating back to the 27th March.

The main reason for Sterling’s demise is the uncertain UK outlook from the financial markets, largely due to the economic data prints in the week.

Primarily lower than expected inflation print on Wednesday changed the outlook of Thursdays Bank of England interest rate decision. Inflation levels on Wednesday came out at 6.7% down from 6.8% but noticeably lower than the consensus forecasts of 7%.

Core inflation also declined sharply to 6.2% down from the forecasted 6.9% showing inflation is becoming less ‘sticky’ in the UK. In the earlier part of the week futures markets had Thursday’s meeting priced in at 80% chance of a hike and 20% chance of a pause, by Wednesday morning the probability had slipped to a 53% chance of a hike and 47% chance of a pause by the Bank. Thus, keeping pressure on an already faltering pound.

This data was the catalyst for Thursdays narrow 5-4 vote in favour of a pause, bring the curtain down on the Banks 14 consecutive base rate hikes from 0.1% – 5.25%. To further weaken Sterling the futures markets now price terminal rates in the UK at 5.4%, it was not long ago we had JP morgan calling for 7% base rate should the market conditions warrant it. Dankse bank have commented they now see November’s meeting also being a pause, stating the lack of significant data releases and time for considerable change to those releases (most notably wage growth and core inflation) between now and the 2nd November a key reason for the pause.

It is no surprise Dankse bank are bearish on the pound, with their six-month forecast for GBP/EUR weighing in at 1.1365. The bank are negative on the UK economy and tip it to underperform in coming months along with a less hawkish Bank of England.
Supporting the economic slowdown for the UK theory, Fridays Retail sales did little to excite the markets. A modest uptick to 0.4% growth for August, slightly under shot the 0.5% consensus.

Noticeably the year-on-year growth from August 2022 printed at 1.4%, showing the difficultly the retail sector is having. To put some context to how vital the retail sector is for the UK economy, in 2022 the total value of UK retail sales was £441bn, it contributes 5% to the UK Gross Domestic Product (GDP), roughly one third of total consumer spending goes through the sector and it employs roughly 3 million people. Its easy to see why weak figures can act as an early indication to the UK economic health.

Nevertheless, Rabobank have recently published their bullish Sterling forecast and tip rates to hit 1.1765 within a three-six month timeframe, a 2.5% upward swing from where levels finished the week. They consider a less hawkish Bank of England could benefit the pound, by strengthening the Economic profile of the country. A lower peak in rates, should soften the recessionary risk for the UK thus benefitting the pounds recent sensitivity to growth expectations.

Eurozone data shows no signs of a recovery across the continent, although there were small hints that the downturn was bottoming out. French PMI service sector data, declined to a 34-month low along with the Flash manufacturing PMI dipping to 43.6 from 46 previously. Data from Germany was mildly better with manufacturing and service PMI both showing mild positive gains against the forecasted prints.

Rabobank use the recent weak economic data sets from the bloc to further support their Bullish projections for GBP/EUR. Stating the recent revise of growth projections across the Bloc by the European Central Bank, supporting the Banks hypothesis of a technical recession in the second half of 2023 and a shallow recovery through 2024.

The Dollar has regained its strength and had a very successful weak across the board. Cable levels posted its third consecutive weekly decline, continuing its bearish trend that began mid-July. Since then, Cable levels have fallen from 1.31 to 1.2235, a 6.6% decline.

The recent strength of economic data from the US has provided the greenback with solid support, combined with recent Federal reserve comments. The FOMC kept the Fed interest rate unchanged as expected at the range of 5.25%-5.50%.

In their projections, most members anticipate that further tightening may be appropriate before year-end. They also forecasted less rate easing for the next year compared to previous expectations, so base rates in the US could be higher for longer.

Fed Chair Jerome Powell reiterated the message and tone of recent weeks and meetings, emphasising that future rate hikes are still likely if inflation rebounds and the economy continues to perform well, particularly with a tight labour market. Following the meeting, the data showed that the US labour market remains robust with initial and continuing jobless claims reaching their lowest levels since January. The US dollar index, which measures the value of the dollar against a basket of foreign currencies (Euro, Japanese Yen, Swiss Franc, Pound Sterling, Canadian Dollar and Swedish Krona) posted its 10th consecutive weekly gain, marking a record streak.

Should you have a currency exchange to carry out involving buying or selling the Pound it is more important than ever to have an experienced and proactive currency broker on your side. Feel free to contact me today on [email protected] and I will be happy to discuss the various options available to you.

The post Will the pound continue to fall? Sterling exchange rates hit multi-month lows appeared first on Pound Sterling Forecast.