The British Pound is pushing higher on US Dollar weakness. But the long-term outlook is still unclear.
The pound slumped to a record low against the dollar last week, following a series of disastrous fiscal policy announcements by the government. Some analysts predict that it may soon slip to parity with the greenback, a level not seen since 1985.
1. ECB President Mario Draghi’s Speech
In his final speech as ECB president, Mario Draghi vowed to keep the eurozone together. He praised his colleagues for their commitment to price stability, and stressed that the bank had always “never accepted failure.”
When Greece began its debt crisis, he stretched the flexibility of the ECB’s rules to keep emergency liquidity flowing to Greek banks. That activism made him stand out among ECB officials as well as European finance ministers.
A week later, Draghi cut interest rates to record lows and started a bond-buying program. He argued that the moves were designed to stimulate growth.
He said the new measures would return inflation to the ECB’s target of below but close to 2%, and help strengthen European demand. However, he also highlighted the need for governments to do more to improve their fiscal position.
2. US Inflation Data
The British Pound (GBP) is pushing higher on US Dollar weakness. The currency pair is up over a percent following the release of US inflation data which showed inflation cooled in November, but markets are scaling back bets on further interest rate hikes from the Federal Reserve.
The figures show headline inflation slipped to 8.5% from 9.1% in the year to July, but it was below expectations for a 8.7% reading and the core CPI measure came in at 5.9%, which was above consensus for a 5.8% rise.
However, the UK economy is showing signs of slowing down and inflation will remain a big concern. It means that if the pound continues to weaken, it will make UK goods and services more expensive for Americans paying in dollars.
The pound also faces a challenge from new government tax cuts that finance minister Kwasi Kwarteng hopes will stimulate growth and wealth creation, but may end up raising borrowing costs and dampening spending. Those rising rates will also mean homeowners have to pay bigger mortgage bills and will have less money to spend on other goods and services.
3. Bank of England Rate Hike
The Bank of England pushed up its rate by a half percentage point Thursday, its eighth hike in a row and another step in a campaign to fight stubbornly high inflation. The move was widely expected and came in line with forecasts based on market pricing.
The decision comes at a critical moment for the British economy, which is already in recession. The economy faces a shortage of workers and has been hit by sharp rises in energy prices.
It also is under pressure to keep inflation from eroding living standards and hurting growth. Inflation has slowed this year, but it remains a drag on the economy and is fuelling a cost-of-living crisis, public-sector strikes and fears of a recession.
Inflation peaked in November, and the Bank expects it to fall gradually this year and next, eventually dropping beneath its 2% target. However, the central bank’s forecasts do not indicate this will happen immediately and warn that Britain may be about to enter a prolonged recession.
4. UK Retail Sales
The British Pound has been on the slide this morning on US Dollar weakness as the Bank of England rates hike could be pared back. A weaker pound could also mean that imports of essential goods may become more expensive, prolonging the period of high inflation.
UK Retail Sales are one of the most important indicators for the pound and have been closely watched by markets in recent months. They are based on total sales receipts of retail stores and reflect consumer spending across the country.
However, the latest UK retail sales data were a real dampener for GBPUSD. Retail sales volumes fell 1% in December compared to November and that was significantly worse than economists expected.
Rising prices and affordability concerns are putting pressure on consumers to cut back on their spending. This is reflected in the latest data as non-food sales volumes fell by 2.1%. Similarly, food store volumes were down 0.3%. These figures are likely to be a key indicator of the pressures on household budgets.