Home Daily Commentaries Sterling stronger ahead of Bank of England decision this week

Sterling stronger ahead of Bank of England decision this week

Monday 1 August, 2022

Daily Currency Update

Sterling has had little macroeconomic data to consider these past couple of weeks, and so it has taken direction from data elsewhere. This has seen GBP/USD push back above 1.2200, despite the US Federal Reserve raising interest rates by 75 basis points (bp). The future path for interest rate hikes has been called into question as Jerome Powell signalled that a 50/75 bp hike is expected in September, but following this, further increases will be data dependent. Following these comments on Wednesday last week, US advanced GDP figures were released, and they fell below expectation, showing a second quarter of negative territory results. Two quarters of economic downturn is classified as a technical recession in the UK, but not in the US. It does, however, increase recessionary concerns in the US. GBP/EUR has similarly gained and is back above 1.1900. Year-on-year inflation hit 8.9% in the Eurozone on Friday, which was higher than expected. This places further pressure on the European Central Bank to raise interest rates, however no change is expected this month with the next rise expected in September. The next interest rate decision from the Bank of England is due on Thursday. A 50 bp hike is expected, but we haven’t seen a hike greater than 25 bp since the Bank of England gained independence from the government in 1997. A 50 bp hike was predicted for the last announcement, but we only saw a 25 bp hike.

Key Movers

Eurozone data has hit the euro hard recently. Inflation data last week reached 8.9%. German retail sales suffered their sharpest annual fall in decades in June, as sales fell by 8.8% from a year earlier, while in month-on-month terms, they fell 1.6%. And energy supplies into Germany via Nord Stream have been reduced to 20% due to further maintenance of the pipeline. Data earlier this morning also showed that factory activity in the Eurozone contracted in July, with the region’s manufacturing PMI index falling to 49.8, compared with a reading of 52.1 the previous month. This isn’t painting a pretty picture for the euro which has already lost significant ground against both the GBP and USD. All this disappointing data is pointing towards a recession in the region. Some market commentators are now sighting a fall to parity for the EUR/USD in the coming weeks, which could also see Sterling strengthen against the euro.

Expected Ranges

  • GBP/USD: 1.2150 - 1.2290 ▲
  • GBP/EUR: 1.1910 - 1.1980 ▲
  • GBP/AUD: 1.7260 - 1.7550 ▲
  • EUR/USD: 1.0120 - 1.0290 ▲