Currency Update – 28 March 2023

GBP
The Bank of England (BoE) raised UK interest rates by another 25bps to 4.25% yesterday, marking the 11th consecutive rate increase from the bank, albeit at a reduced pace this month, in a process which began at the end of 2021. The move came despite the recent banking turmoil and market jitters, following the likes of the ECB and Fed. Seven of the nine MPC members voted for the hike, with the remaining two favouring a pause given circumstances.
In their accompanying statement, the BoE suggested that UK banks were resilient and were well placed to continue supporting the UK economy, including a period of higher interest rates. It is fair to say that (so far) this has been the case.
Of course, markets had already settled on a 25bps hike given the unexpected surge in UK inflation, with the latest data being released a couple of days beforehand, however, the BoE suggested that CPI is still expected to fall ‘significantly’ by the summer, and perhaps to a lower amount than predicted in the previous month, which could help the BoE reach their terminal rate sooner than had been expected. It therefore looks as though this month’s increase (in inflation) could be a one-off. We live in hope.
On the economy, the BoE were ‘more hopeful’, suggesting that growth is expected to remain in positive territory, even during Q2, which had previously been forecast to decline. The next GDP report is released this time next week.
For the most part, the pound continues to strengthen across the board. GBP/USD has now risen from a Jay Powell-induced low of 1.1800 on the 8th March, to over 1.2300 earlier yesterday. 1.2500 remains the key topside point for sterling bulls to be drawn to. GBP/EUR did start the week in fine fettle, moving back over 1.1400, but the super-strong single currency came roaring back later in the week, which sent GBP/EUR back under 1.1300 for a spell. However, the likes of GBP/CAD continue to gyrate towards multi-month tops, highlighting broader underlying strength for the pound.
EUR
Markets can be a bit like Dory from Finding Nemo some days, forgetting what happening previously and needing an almost constant reminder that everything is o.k. The past two weeks could be a good example of this it seems. ECB Head Christine Lagarde really gets this, and has been constantly visible over the past week, doubling down on the ECB’s commitment to fighting inflation, suggesting that there was ‘no tradeoff’ between fighting inflation and supporting stability in the banking system. Whilst Lagarde reiterated that future rate hikes will be data dependent, she made no excuses for the ECB’s commitment to tackle inflation and did not mix her words. It felt like her Draghi moment.
Having raised rates by 50bps to 3.5% last week, the strong messaging from the ECB has helped to fuel market-implied expectations for further rate hikes, especially given the unexpected increases amongst regional inflation of late. On that note, both Spain and Germany will be releasing their latest inflation reports through next week, with the former expected to decline, but key German inflation has been forecast to increase over the past month. Regional inflation is also released a little later in the week.
The single currency has had a week to remember. Buoyed by the hawkish comments from Lagarde, and further fuelled by a weakening dollar, EUR/USD surged beyond 1.0900, having been as low as 1.0516 on the 15th March. With the Fed looking as though they are nearly at their terminal rate (see USD), further upside gains could still be achieved, as expected rate differentials fuel the single currency.