Weekly Market Report

The main driver of currency markets over the past week has been central bank policy, with both the Bank of England and European Central Bank delivering key rate decisions last week. Both central banks held interest rates on hold, but the messaging around those decisions have shifted expectations to some extent.

The Bank of England kept interest rates at 3.75% with an 8-1 vote split, highlighting concerns around inflation. The tone was slightly more cautious than it had been previously with policymakers warning that higher inflation caused by rising energy prices may require tighter policy going forward.

Similarly, the ECB held rates at 2.15% but also signalled increasing upside risk to inflation and left the door open to a potential rate hike as early as June.

The key takeaway from these decisions is that central banks are not ready to cut rates and may still need to tighten to cope with increasing energy costs and inflation. Sterling found more strength than the Euro in the aftermath because UK rate expectations remain slightly higher, while the Eurozone is dealing with more growth concerns.

However, with President Trump’s Operation Freedom having commenced yesterday, the Dollar has found some renewed support to start the week.

What this may mean for businesses

Keeping an eye on headlines involving the USA/Iran War, the Straight of Hormuz and Operation Freedom may be particularly important to businesses transacting in USD.

The current environment increases the risk of short-term swings driven by data, central bank commentary and headlines rather than a clear long-term trend.

For businesses pricing in advanced, this uncertainty could potentially make it more difficult to predict future costs when relying solely on spot conversions.

In practice, this is leading more businesses to look at fixing rates with forward contracts, allowing them to remove that uncertainty and work to a defined cost base.