Monthly Wrap: GBP – Pound weakens on UK economic woes

June 30, 2022

Key takeaways:

–              Pound undermined by UK’s gloomy economic outlook
–              BoE’s hawkish forward guidance helps to temper losses
–              GBP Monthly lows: €1.14, $1.19, AU$1.73, NZ$1.89, C$1.55
–              GBP Monthly highs: €1.17, $1.26, AU$1.78, NZ$1.96, C$1.60

The pound trended broadly lower through June, the currency being primarily undermined by concerns over the UK’s economic trajectory.

The country’s economic woes continued to build over the past four weeks. With a number of underwhelming data releases highlighting the impact of the UK’s cost of living crisis and stoking recession fears.

Sterling sentiment was also dented by UK political uncertainty. Boris Johnson’s narrower than expected victory in a no-confidence vote called in early June failed to ease questions over the future of his premiership.

Fresh Brexit jitters also took their toll on GBP exchange rates as Johnson’s government pushed forward with plans to unilaterally change the Northern Ireland protocol bill.

GBP investors fear the move could lead to a trade dispute between the UK and EU, bringing further disruption to the UK’s already fragile economy.

One bright spot for the pound was the Bank of England’s (BoE) latest interest rate decision.

While the BoE’s 25 basis point rate hike looked inadequate in the face of the US Federal Reserve’s 75bps hike. GBP investors seized on the BoE’s hawkish forward guidance, which hinted future hikes from the bank could be more aggressive.

Looking ahead, we might see tensions between the UK and EU rise over the coming month. This may stoke fears of a UK-EU trade war and weigh on the pound through July.

Domestic political developments could also dent Sterling sentiment, especially if there are any signs that Conservative rebels may attempt to change party rules to allow another no-confidence vote against Boris Johnson this year.

Meanwhile, GBP investors will also keep an ear out for any comments from BoE policymakers which may shed more light on the bank’s plans for its August interest rate decision. Any additional signals that the BoE will pursue a 50bps hike could help to underpin the pound.