“Slowing Down Interest Rate Rises, High Oil Prices and the Struggling Sterling”
The Bank of England held interest rates at 5.25% in September after 14 consecutive rises since December 2021, when the Bank rate stood at just 0.1%. It followed broadly positive news from the Office for National Statistics that inflation continues to fall in August to 6.7% (from 6.8% in July and 7.9% in June). Along with this, UK mortgage approvals fell in August to their lowest level in six months as high interest rates cooled the housing market.
Secondly, oil has soared by almost 30% since end-June, with prices set for the biggest quarterly gain since March 2022 thanks to supply curbs from OPEC+ linchpins Saudi Arabia and Russia and brighter outlooks in the two biggest economies, the US and China. There are plenty of signs of tightness in the physical market, too. Russia last week announced a temporary ban on diesel and gasoline exports, while US crude stockpiles fell again.
Crude oil has pushed closer to the $100-a-barrel milestone after stockpiles at a major storage hub in Oklahoma dropped to critical levels and highlighted a widening global deficit. WTI briefly moved above $95-a-barrel on Wednesday in its biggest gain since early May. “It really all boils down to concerns over supply tightness continuing and even exacerbating going into the northern hemisphere winter months,” said Vandana Hari, founder of consultancy Vanda Insights.
The Pound Euro (GBP/EUR) exchange rate weakened this month, following signs of further contraction in the UK private sector. Following on from a disappointing slate of private sector indexes, the Pound may be unable to recover from staunch losses. Further contractions have been seen in both manufacturing and service sectors, which sparked additional recession anxieties among GBP investors. This came in tandem with the surprise pause from the Bank of England. Furthermore, the latest retail sales data indicated an improvement in sales, but missed forecasts by a hair, disappointing investors. Because of this, Sterling is unlikely to be able to recover in the short term, despite an upbeat market mood.
While economists anticipate an improvement, the reading is expected to remain deep in contractionary territory. Because of this, Sterling may be unable to gain ground against its peers. Elsewhere, market mood could play a roll in shaping Sterling rates. As an increasingly risk-sensitive currency, the Pound may need to rely on a shift to bullish trade in order to strengthen against safer assets, such as the Euro.
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