Sterling meanders – downside risks prevail

Phew, the UK economy avoided recession in 2022, even with December’s huge 0.50 per cent contraction. UK GDP increased by an estimated four per cent over the course of 2022, following a 7.6 per cent post Covid-19 rebound in 2021. However, the UK is the only G7 nation yet to fully recover output lost during the pandemic.

The markets remain pessimistic for the UK in 2023, and Sterling is currently meandering through a narrow range versus the US Dollar and Euro. The forecasted 2023 ranges hold firm (US$ 1.1650 to 1.2650 and Euro, 1.1050 to 1.2150) with small rallies and dips as Sterling reacts to economic data releases. By publication, the Chancellor Jeremy Hunt will have delivered his Spring Budget. It is expected to focus on how the government plans to get the economy growing faster, one of prime minister Rishi Sunak’s five priorities. Even with January’s higher than expected tax take and better economic numbers, big tax cuts are unlikely and not in keeping with the tone of Hunt and Sunak so far. Expect little Sterling reaction to the Budget once the dust has settled.

The EU acknowledged perhaps some Northern Ireland Protocol implementation elements should be tweaked, opening the door for the latest Brexit ‘deal’ between the UK and EU. Aimed to smooth out inter UK trade and provide the perception of less EU jurisdictional control. The hope is this deal restores a functioning government in Belfast.

Sterling mildly reacted positively to the Northern Ireland Protocol news, inching one per cent higher against the US Dolar and Euro. Sterling’s meander forward was soon pulled back by Andrew Bailey, The Bank of England Governor. Bailey indicated the prospect of a further rate hike is close to 50/50 and entirely dependent on data to be released ahead of the March 23 interest rate decision.

With the Labour Party practically in campaign mode for the next general election, Sunak and Hunt are likely to try and take the wind from their sails. The challenge at this time is the wrong policy could stymie the drive for growth or spook the markets yet again.

Another Sunak priority is the halving of inflation this year. Many will argue this is not currently a gift of government, it is however a main objective of the Bank of England. The speed of decline coupled with how the economy performs versus expectations will drive market sentiment on how much further (if at all) the Bank of England are likely to raise interest rates. Citi Bank amongst others are predicting inflation could fall below two per cent by the end of the year. Energy prices could remain a thorn for inflation predications. Chinese demand for gas after the lifting of Covid restrictions, escalation of the war in Ukraine are all factors in play. Additionally, if Russia starts to make significant gains, the West may look to close the, yet to be sanctioned, loophole that allows energy and commodities to flow via India to the rest of the world. With cost pressures still challenging for businesses, reviewing the costs being incurred and the strategy of managing currency exposure becomes even more important. Specialist support as provided by companies like Ascendant, can fill a gap not provided by larger financial institutions.

For more information on how Ascendant can benchmark your current supplier and to hear about how we are reducing the cost of foreign exchange for local businesses, contact karen.benson@ ascendant.world