Currency markets were subjected to choppy trading on Tuesday as the Bank of Japan policy tweak triggered sharp moves with risk conditions generally on the defensive.
The Pound to Dollar (GBP/USD) exchange rate dipped to 1.2100 before rebounding to highs around 1.2190.
GBP/USD was unable to hold gains and retreated to near 1.2130 on Wednesday.
The Pound to Euro (GBP/EUR) exchange rate hit resistance at 1.1470 and retreated to 1.1425 on Wednesday.
Significantly, the Pound lost ground on Wednesday despite gains in equity markets which suggests there has been underlying selling.
Trading volumes will decline sharply during the holiday period and Simon Harvey, head of FX analysis at Monex Europe, commented; “Price action in the pound is reflective of thin market liquidity conditions, as is usually the case around this time of the year.”
The November UK government public-sector borrowing requirement widened sharply to £22.0bn from £8.1bn the previous year which was above consensus forecasts of around £14.0bn and the largest November deficit on record.
There was strong upward pressure on spending with an annual increase of close to 20%.
The ONS estimated that government energy support payments cost £1.9bn in November.
There was also a sharp increase in debt interest payments to £7.3bn from £4.9bn the previous year.
For the first 8 months of fiscal 2022/23, borrowing declined to £105.4bn from £113.0bn the previous year, but substantially higher than £62.2bn three years ago.
The latest OBR estimate is for a deficit of £177bn for the fiscal year and 7.1% of GDP.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, noted several sources of upward pressure on spending; “The energy price guarantee was the main driver of a £4.7bn year-over-year rise in subsidies. In addition, social assistance payments were £3.3bn higher than a year ago, reflecting the payment of the second cost of living grants to working-age benefit recipients.”
Tombs, expects further underlying upward pressure on borrowing; “The rolling nature of the (government’s) new fiscal targets, and building demographic pressure, suggest that plans for very modest real-terms increases in departments’ budgets in the mid-2020s will not be followed.”
The Lloyds bank business barometer increased to 17% for December from 10% in November and the first increase since May.
Overall confidence was still well below 40% in December 2021 and also below the long-term average
There was also a recovery in hiring intensions from an 18-month low.
There was some evidence that growth in wages is stabilising, but overall inflation pressures increased with 62% of companies planning to raise prices in 2023 from 60% the previous month.
Lloyds Bank Commercial Banking Senior Economist Hann-Ju Ho commented; “Business confidence has received a boost in the run up to Christmas as firms anticipate a better festive trading period than last year. While firms report being hopeful for a more successful 2023, inflation and the risk of an economic downturn remain the biggest concerns for businesses, with rising costs evidenced by the number of firms expecting to raise prices.”
She added; “Wage growth is expected to remain high for now as retaining existing staff and attracting new talent will continue to be priorities for many businesses going into next year.”
Barclays expects that the Bank of England will be focussed on domestic inflation and wages which will limit any scope for a very dovish policy stance.
It adds; “the core of the MPC is increasingly focused on wage growth and domestic inflation. This points to a hiking cycle close to market pricing, even as the BOE’s hawkish window remains all but closed.”
According to ING; “For this festive season, GBP/USD may hold around 1.2100-1.2250.”
Scotiabank expects solid GBP/USD support on dips; “Broader trends suggest some modest downside risk as spot corrects the sharp rise from the Sep low but sub-1.20 dips are likely to remain well supported.”
Advertisement
Save money on your currency transfers with TorFX, voted International Money Transfer Provider of the Year 2016 – 2020. Their goal is to connect clients with ultra competitive exchange rates and a uniquely dedicated service whether they choose to trade online or over the telephone. Find out more here.
Tim Clayton
Tim is an economist and has been involved in financial markets for over 20 years as an analyst. He…
Contact Tim Clayton
GBP
December 27 2022
The Pound Euro (GBP/EUR) exchange rate weakened over the week before Christmas amid a lack of key economic data, leading investors to focus on headlines from within the UK. At the time of…
GBP
December 31 2022
The UK and Euro-Zone both face major challenges during 2023 with major recession risks. Trends in energy prices will again be an important element during the year. The ECB is set to be more…
GBP
December 17 2022
The Pound Euro (GBP/EUR) exchange rate nosedived on Wednesday. The currency pair fell after the Bank of England (BoE) raised interest rates by 50bps and forecast a fourth quarter recession. The…
» Compare best exchange rates
» Best euro rate?
» Best Dollar rate?
» Best Australian Dollar rate?
» Best Canadian Dollar rate?
<!–» Pound to Euro exchange rate today
» Pound to Dollar exchange rate today
» Pound to Australian Dollar
» Pound to Canadian Dollar
» Pound to NZ Dollar rate today–> <!–Want these rates? Get FREE Quote Now!–>
Copyright © 2006-2021 Exchange Rates UK. All rights reserved. The advice provided on this website is general advice only and does not constitute as a financial recommendation. Any news, opinions, research, analysis, values or other information contained on this story, by Exchange Rates UK, its employees, partners or contributors, is provided as general market commentary. Exchange Rates UK will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.
Sterling Slips, Pound To Dollar Rate Defends 1.20 – Exchange Rates UK
