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Currency research

Currency research

Information and analysis to help you stay up to date with the foreign exchange markets.

Pound backtracks as Carney dampens May rate rise bets

Mon 23 April 2018

Highlights from last week:

  • Bank of England’s Carney casts doubts over May interest rate rise
  • UK inflation slows again, retail sales disappoint
  • Bank of Canada keeps interest rates at 1.25%

The week ahead:

  • European Central Bank policy meeting (Thursday, 12:45pm)
  • UK first-quarter GDP growth data (Friday, 9:30am)
  • US first-quarter GDP growth data (Friday, 1:30pm)

Sterling slips on Carney comments and weak data

Sterling climbed to its highest level against the US dollar since June 2016 last week, but then backtracked sharply amid disappointing domestic data and growing doubts over a UK interest rate rise next month.

Expectations the Bank of England (BoE) could lift UK interest rates next month had been boosting the pound’s appeal. However, comments from BoE Governor Mark Carney on Thursday suggested this will be a less clear-cut decision than might have been expected, highlighting that there are other meetings later in the year when the central bank could opt to nudge interest rates higher.

Last week’s UK data will give policymakers food for thought. Inflation came in lower than expected for a second consecutive month, slipping from 2.7% to 2.5% in February. Retail sales posted their biggest quarterly drop in a year during the three months to March. Wage growth in the three months to February was unchanged from January’s measure. Average earnings increased by 2.8%, which was weaker than anticipated but still the highest reading since late 2015.

Euro zone inflation rises more slowly than expected

Euro zone economic developments were relatively limited last week and any new data available had only a muted impact on the euro. Euro zone inflation rose by 1.3% in the year to March, which was slightly slower than the initial 1.4% estimate. The European Central Bank is likely to be more wary of withdrawing its stimulus measures too quickly if inflation across the region remains stubbornly weak. The sterling/euro exchange rate initially rose to new 10-month highs (at last week’s peak, £10,000 would have bought €11,454 with our telephone Currency Service). But these gains were erased after Wednesday’s weak UK inflation figures. BoE Governor Carney’s comments then pulled sterling/euro back down to within one cent of its April lows.

US dollar recovers but trade concerns linger

Continuing concerns surrounding a trade dispute between the US and China initially kept the US dollar on the back foot. The currency came under some selling pressure after President Trump accused both China and Russia of devaluing their currencies to gain an unfair trading advantage, as a weaker currency makes their exports more competitive when trading internationally. By Friday evening, £10,000 would have bought US$13,861 with our telephone Currency Service.

Central bank communications limit Canadian and Australian dollar gains

The Canadian dollar weakened after the Bank of Canada’s policy meeting on Wednesday. Canada’s central bank kept interest rates on hold at 1.25% as was widely expected. The meeting provided no clear indication on when interest rates might rise next. Potential changes in international trade policies and high household debt levels were identified as economic headwinds warranting interest rates to remain low for the time being. By Friday evening, £10,000 would have bought C$17,656 with our telephone Currency Service.

The Australian dollar fell against sterling on Tuesday after minutes from the Reserve Bank of Australia’s recent policy meeting confirmed there was no strong case for interest rates to rise yet. The central bank was cautiously optimistic over the prospects for the domestic and global economies, sufficiently so to note that the next move on interest rates would be up rather than down. By Friday evening, £10,000 would have bought AUD$18,066 with our telephone Currency Service.

China’s Gross Domestic Product (GDP) rose at a 6.8% annualised rate in the first quarter of the year. This was in line with expectations and added to optimism surrounding the global economy.

The week ahead

Domestically, a first estimate of the UK’s first-quarter GDP growth (Friday, 9:30am) will headline the economic data calendar. This will give an important insight into the economy’s resilience amid continuing Brexit-related uncertainties and the negative impact of severe bad weather early in the year. Public sector borrowing figures (Tuesday, 9:30am), mortgage approvals data (Thursday, 9:30am) and consumer confidence data (Friday, 00:01am) are also scheduled. BoE Governor Mark Carney is due to deliver a speech on Friday (3:00pm).

A first estimate of US first-quarter GDP growth is due on Friday (1:30pm). This will be an important indicator of US economic performance ahead of next week’s Federal Reserve policy meeting. Other US data releases include new home sales figures (Tuesday, 3:00pm) and durable goods orders data (Thursday, 1:30pm).

The key event on the euro zone calendar is Thursday’s European Central Bank (ECB) monetary policy announcement (12:45pm), along with the policy statement and press conference (from 1:30pm). No policy changes are anticipated this time around, but these communications will be scrutinised for any clues on the potential end date of the ECB’s quantitative easing measures which are currently due to run until September.

View UK, US and euro zone announcements with our economic calendar

Other key data releases:

Australian consumer price inflation (Tuesday, 2:30am)

German business climate data (Tuesday, 9:00am)

Japanese consumer price inflation data (Friday, 00:30am)

Bank of Japan interest rate decision (Friday, 3:00am)

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