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  • richard evans

GBP lower despite BoEs 50bps rate rise

Good morning

I spent much of Wednesday and Thursday out of the office meeting with clients and potential clients and indeed people who are never likely to become clients but are well worth spending time with anyway as you get a real insight into how people in other walks of life see things and what impacts them in their daily life. I have to say there are not many things better than meeting people that I already know and meeting new people, I have always enjoyed it I think if anything the Covid lockdowns have made me relish these moments more than ever.

So what have I missed while I have been enjoying myself. Well of course I should start with the BoEs 50bps rate rise which took rates to 5%. It remains to be seen how well these rate rises deal with inflation. Recent rate moves certainly don’t seem to have had the desired effect and there must surely come a point where it is reasonable to say ‘hold on, this isn’t working’. Or maybe it is working, maybe inflation would be even higher now if rates hadn’t gone up. But I’m not so sure. The chances of another 50bps rate rise in August has risen, followed by another 25bps in Sept, which would see rates at 5.75%, citing the stubbornness of core CPI which remains elevated despite headline inflation numbers slipping back. A peak of 6% is certainly not out of the question.

Rates will be high for a long time so savers will be happy, mortgage holders less so. I presume the government earn more in tax with higher rates so I’m thinking they’ll be reasonably grateful for the additional income.

Anyway I’d mentioned on Wednesday that a 50bps was possible and even looked at a trade idea that would take advantage of the stronger GBP that would surely follow such a move. And what happened? GBP is generally lower than before the announcement. GBPUSD is 1.2700 as I type. GBPEUR had been at 1.1640 but since I started writing has moved up to 1.1690 as EURUSD breaks sharply lower, from 1.0920 to 1.0860. We have just had a weak set of German PMIs, probably the reason although the move came a little before that release which was a bit odd.

Against other currencies we have seen a stronger GBP, but this is more down to the weakness of the other currency. For example GBPJPY is trading up at 182.35 after yen weakness took USDJPY to 143.30, despite slightly higher than expected inflation from Japan, while GBPAUD is within touching distance of 1.9000 in a move which as yet I have found no sensible explanation for.

On Wednesday I had mentioned the potential for gold to decline and looked at some downside trade ideas with a $1920 strike. Timing is everything, by Wednesday afternoon it has slipped to $1920 and despite a brief recovery, it now sits at $1915. Anyone who bought the straight vanilla put for $15 could buy half the amount of spot here which doesn’t make it completely free but does give good potential for profit regardless of which way it moves. Those taking the cheaper option with the knock out will have to sit it out and wait.

I’m going to leave it there for now as I’m playing a bit of catch up after my travels. We do have EU, UK and US PMIs today which can certainly move the markets so keep your eye on those.

Have a great weekend, not much in the way of sport over the weekend but with temperatures up near 30 degrees I’ll hopefully spend more time outside than in. Nothing like the smell of cut grass and barbeques……

- 09.00 EU manufacturing, services PMI

- 09.30 UK S&P manufacturing, services PMI

- 10.15 Feds Bullard speaks

- 13.00 Feds Bostic speaks

- 13.45 ECBs Panetta speaks

- 14.45 US S&P manufacturing, services PMI

- 18.40 Feds Mester speaks

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