Despite the recent Global banking issues, but due to an unexpected surge in inflation, the Bank of England has raised interest rates by 0.25% taking the base rate to 4.25%.
However BOE governor Andrew Bailey expects that inflation will fall sharply from the middle of 2023, and raising interest rates was the best way to bring down inflation. Some economists predict that interest rates could now be at their peak, but others suspect rates will rise again to 4.5% by this summer.
The UK looks like it will comfortably avoid recession after a recent study showed that 11 of the 14 sectors of the economy are up month on month, and the best they’ve been for a year. Despite this, the UK is still the only country in the G7 to not reach pre-Covid GDP levels and is still likely to clock the worst growth in the group in 2023, it will therefore likely sustain a period of stagnation rather than growth.
The U.S Fed also raised interest rates by 0.25% this week despite the recent failure of their 16th largest bank SVB. The FED stated that despite the recent failure, the banking sector remains ‘strong and resilient. But the FED also warned that the fallout from bank failures could hurt economic growth in the coming months.
GBPUSD rose to around 1.2325 after the BOE hiked rates which is the highest level in almost 2 months, then fell back to reside around 1.2270. The pair have dropped back slightly this morning to 1.2210 after both services and manufacturing PMI data came in slightly below consensus, of which manufacturing is still showing contraction.
The Euro was strengthening over the past couple of days particularly against the dollar but has fallen back after both consumer confidence on Thursday afternoon and Eurozone manufacturing PMI posted negative numbers. Despite this, the overall outlook for business activity looks to be gathering steam particularly driven by the resilience in the services sector.
GBPEUR currently resides at 1.1382 up from 1.13 yesterday morning.
EURUSD briefly touched 1.09 on Thursday, the highest since the beginning of February but has now back tracked to 1.0730.