President Donald Trump is on the offensive in the trade war with China. This has ensured that the dollar is receiving all the attention on the currency markets. This may, however, change today. The British Central Bank will provide insight into the summary of yesterday's meeting. At the meeting, no decision was taken about an adjustment to the interest rate policy. The impact of the foreign exchange markets might be even more significant if a decision were to be taken.
Uncertain outcome
Traders reckon there is a 50% chance that the United Kingdom will announce an increase in the interest rate in August. The Bank of England's notes might hold some clues. It can be gleaned whether they are anticipating an interest hike or one that will remain as is, for the moment. The chance of it staying unchanged has increased over the last week. In May, the British inflation rate remained stable at 2,4%. Economists had predicted a slight increase. The high inflation rate is mainly due to the ever-increasing energy costs.
From other economic figures, it seems that British consumers are still having a hard time. In the twelve months after the Brexit referendum, the pound's value dropped by about 15% against the euro. This has made it considerably more expensive to import goods and services. The UK has a very low unemployment rate of 4,2%. Despite this, salaries are hardly able to keep up with the inflation rate. Many households also have less buying power than they had two years ago. The economy grew by a mere 0,1% in the first quarter. Does the Bank of England really dare to raise interest rates under these circumstances? Do they want to run the risk of nipping this fragile growth in the bud?
The interest rate decision is not determined solely by economic developments. This makes it even more difficult to answer these questions. The Central Bank is also keeping an eye on the Brexit discussions. Britain's economy and the pound may encounter a new twist. These negotiations might run aground, or the country might leave the EU with no effective agreements in place. The British pound has stabilised around the €1,14 level in recent months. This was after a spike of more than €1,40 in November 2015. For now, it seems more likely that the currency will take another step back rather than recover.
Laurens Maartens (laurens.maartens@nbwm.nl) is currency expert at the Nederlandsche Betaal & Wisselmaatschappij (www.nbwm.nl). He started his career in 1998 at the Swiss bank, UBS. Since then he has worked at various Dutch and international companies. He gives commentary on current currency developments in newspapers, on websites, and on the radio. He also offers lectures and training to business people in the area of currency management. Here, he stresses to participants to mainly choose simple, inexpensive currency products. This column reflects his personal opinion. This information is not intended as professional investment advice or as a recommendation to make certain investments with the Nederlandsche Betaal & Wisselmaatschappij NV.