The reign of chaos continues in the gilts market amid the whole will they, won’t they situation with regards to the BOE this week. The central bank was caught amid conflicting messages as to whether or not they will offer support to UK bonds beyond Friday’s deadline. But the final say seems to be that they will not.
30-year gilt yields briefly clipped above the high last month, touching 5.10% yesterday, but things are looking just a little bit calmer today. However, seeing how yields have risen in each of every day in October might be a bit unsettling if you’re an investor – or even just an onlooker:
There’s still a lot of tension in the works now and it’s not likely to abate as we count down to Friday and the end of the support by the BOE.
As such, the pound remains rather vulnerable even if it did catch a decent push higher yesterday. GBP/USD is down today by 0.4% to 1.1060 with the dollar in focus ahead of the US CPI data:
The mood in the greenback will largely set the tone for the coming sessions in cable, but it’s hard to imagine sterling finding much reason to rally on its own given the latest fiasco above.
As things stand, there is a lack of confidence overall despite the BOE’s efforts to try and stabilise the financial system. The feeling is akin to that of plastering band aids all over the place to fix a leaking dam. Sure, the central bank has every right and authority to keep doing what it did in this instance but doesn’t that just show that there are things going awry somewhere with pension funds? That’s not comforting to say the least.
This goes beyond QE-style support now for the BOE. It’s a question of financial credibility instead.
And when you even have to start questioning that in an economy the size such as the UK, that’s oddly unsettling and isn’t a good look for the pound. Throw in the fact that you have rampaging inflation
Inflation
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Inflation is defined as a quantitative measure of the rate in which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general level of prices where a given currency effectively buys less than it did in prior periods.In terms of assessing the strength or currencies, and by extension foreign exchange, inflation or measures of it are extremely influential. Inflation stems from the overall creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply in relation to the wealth produced (measured with GDP). As such, this generates pressure of demand on a supply that does not increase at the same rate. The consumer price index then increases, generating inflation.How Does Inflation Affect Forex?The level of inflation has a direct impact on the exchange rate between two currencies on several levels.This includes purchasing power parity, which attempts to compare different purchasing powers of each country according to the general price level. In doing so, this makes it possible to determine the country with the most expensive cost of living.The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates on the forex market.Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on foreign exchange. Conversely, inflation that is too low (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the forex market.
Read this Term, rising interest rates amid a cost-of-living crisis, a government running up against the central bank, and an economy heading towards a prolonged recession.. there isn’t much room for optimism now, is there?
The only positive I can argue is that all of what is listed are known unknowns for the pound. We already saw a correction from 1.0400 to 1.1500 in that lieu towards the end of last month but unless the US CPI data today prints much cooler than expected, the downside pressure is likely to stay the course in GBP/USD.