Once again the market has seen some significant volatility this week with GBP/EUR falling from a high of 1.1480 to a low of 1.1285 – the big fall for the pound came following higher than expected inflation figures on Wednesday. Rising food prices was the trigger for inflation to reach 10.4% and forced the Bank of England’s hand, raising interest rates for the 11th consecutive month to 4.25%, a 14 year high. However the Governor of the Bank of England, Andrew Bailey, was more optimistic regarding the future of the UK economy suggesting inflation should come down steadily throughout the year.

Looking at the US dollar and rates are still feeling the impact of the banking crisis and senior executives from the now failed Silicon Valley Bank have been called upon by the U.S. Senate Banking Committee on to testify as lawmakers weigh possible action after the banks’ failures triggered market turmoil. This follows on from a slightly surprising interest rate hike by the Fed on Wednesday evening. Many analysts had expected the Fed to hold in an attempt to ease some pressure on a number of other struggling financial institutions in the US. The hike led to a fall in value for the US dollar pushing it to a 6 week low against the pound (1.2330) and 1.09 against the Euro. It has come back a touch this morning to sit at 1.2240 and 1.0770 respectively.

Looking at some of the riskier currencies, in particular we have seen significant movements against the South African Rand (ZAR). In the last month we have seen a low of 21.70 peaking as high as 22.80 – a near 5% swing. According to reports, the ZAR’s slide is being blamed on South Africa’s electricity woes which has seen many homes and businesses go for more than 10 hours without power. We often also see a direct correlation during times of volatility between lower yielding currencies (historically JPY, USD, CHF) and higher yielding currencies (AUD, NZD, ZAR) – when the market is more risk averse you can often see a slide in value for the higher yielding currencies and an increase in demand for the so called “safe haven” currencies.

Moving onto next week, look out for a speech from Andrew Bailey on Monday evening. Any suggestions that the Bank’s recent hawkish stance could be ending and we could see a positive start for sterling. Key data to focus on will be Friday’s UK GDP figures. There are a few green shoots in the economy, including this morning’s retail sales figures and a more positive release on Friday could trigger some sterling positivity.

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