The pound continues to decline today towards its lowest levels in two months, with it reaching the level of 1.24581 against the US dollar (GBP/USD) at around 8:30 am GMT. The price of the euro against the pound sterling (EUR/GBP) reached its highest level in a week, at the level of 0.85969 at the same time in the morning.
These declines in the pound come after Bank of England Governor Andrew Bailey said, before Parliament, that the central bank is nearing the end of its interest rate hike cycle but may need to do more hikes to combat very high inflation. These comments came amid market expectations that the Bank of England would raise interest rates once or twice.
It seems that these statements have revived the British bond market. Since yesterday, we witnessed a sharp decline in bond yields, which wiped out all of this week’s gains. Where the yield on one-year gilts reached 5.119%, and for two-years it reached 5.148%. As for the yield on ten-year gilts, they still retained some gains for this week, despite the sharp decline, as it reached the level of 4.463%. Across the gilt market, we witnessed a recovery at the fastest pace this week, with the Shares Core UK Gilts UCITS ETF (IGLT), which tracks the performance of British gilts, reaching the level of 9.9500 pounds this morning, after reaching its lowest levels in ten days during the day. yesterday.
Markets don’t seem to be interested in a rate hike as much as the health of the British economy. Despite talk of interest rates rising in the future, we are seeing further declines in the pound sterling against the basket of major currencies and a decline in bond yields.
Today, we witnessed more negative data from the British economy, this time from the real estate sector, which recorded a sharp decline in house prices. The Halifax House Price Index recorded the highest decline in house prices since 2009, with a decline of 4.6% in August on an annual basis, compared to expectations for a decline of 3.5%.
I believe that this sharp decline in house prices will give more warning signs about the risk of further interest rate hikes, which have already hurt the real estate market, with mortgage rates at a record high of 7.85%. While we had seen a string of negative data on the UK economy, we are still seeing a contraction in manufacturing and service activities, albeit slower than expected, in light of the August PMI figures. This is despite the growth in construction activities with a stronger than expected construction PMI reading for August.
In addition, the significant decline in retail sales that we witnessed last July highlighted the weak confidence of the British consumer, who is also suffering from high mortgage rates.
In the US, we saw more positive signs that strengthened the dollar’s status as a safe haven, with higher-than-expected ISM services PMI numbers for August, and a smaller-than-expected trade deficit, supported by increased exports. In China as well, today we saw trade balance figures for the month of August which came in below expectations despite a slower than expected slowdown in both exports and imports. These figures come with more talk about government plans to support the private sector and households.