Thursday saw a decline in the value of the pound, the euro, and the dollar as the relief over the Bank of England’s involvement in the bond market subsided.
Additionally, investors expected German inflation data.
Following the BoE’s announcement of an emergency bond-buying programme to support a gilt market that had been in freefall alongside the pound, the British pound increased the most since mid-June on Wednesday.
However, as the U.S. dollar resumed its footing, sterling was 1% weaker at $1.0776 at 07:51 GMT and the euro fell 1% to $0.9642 due to lingering concerns about Britain’s management of the economy and the prospects for global development.
Liz Truss, the prime minister, defended her tax-cutting spending plan.
Since the FX interventions and emergency rate hikes are off the table, there’s only so much the BoE can accomplish to support cable. According to Chris Turner, Global Director of Markets at ING, there will be no shift in the strong dollar narrative over the next six to nine months.
To hold sterling intact until the 3 November BoE rates meeting or the 23 November budget statement will be a difficult assignment for policymakers, he added. Expect cable volatility to remain elevated.
On Monday, investors delivered a damning verdict on Britain’s proposals for tax cuts paid for by a big rise in borrowing while at the same time that the BoE is fighting to control inflation, sending the pound plunging to a historic low of $1.0327.
The appearances of BoE officials Silvana Tenreyro, Huw Pill, and David Ramsden later on Thursday as well as finance minister Kwasi Kwarteng’s speech to his Conservative Party on Monday will be eagerly monitored.
According to DBS currency expert Philip Wee, the sterling is not yet out of the woods. The BoE is seen as treating the symptom rather than the root problem.
The administration has not yet addressed the tax cut proposals’ legitimacy, which critics say will only make the inflation problem worse.
The euro also took a little hit when data revealed that Spain’s annual inflation rate dropped from 10.5% to 9% in September.
German inflation data, which are coming at 1200 GMT, will be eagerly watched by investors for clues about the trajectory of the European Central Bank’s rate hikes.
However, unless there is a complete surprise in the inflation report, the ECB is currently sending a very clear message that it will respond to high inflation levels with substantial rate hikes, according to Esther Reichelt, an FX analyst at Commerzbank.
In the German state of NRW, consumer prices increased by 1.8% month over month in September, marking the largest monthly increase since March, and by 10.1% over the same period last year.
The U.S. dollar index, which compares the value of the dollar to the pound, the euro, and four other currencies, recovered on Wednesday from its worst day from March 2020 to reach 113.78, just shy of its 20-year peak of 114.78.
In Asia, where countries like India, Japan, South Korea, and Indonesia have been meddling in the financial markets to maintain their currencies and asset values, there is an increasing amount of official opposition.
The risk-averse Australian dollar fell 1.2% to $0.6443 in other currency markets.
A new gauge of consumer prices revealed that annual inflation slightly decreased from August to July, raising the possibility that cost pressures may be nearing their peak.