Pound Rises Despite Shortfall in Current Account

On Thursday, the British pound climbed against the US dollar and the euro as well. This was because investors seemed to have shrugged off the official data, which revealed that the current account deficit of the United Kingdom had seen a shortfall in 2022.

The pound rises

There was a 0.2% increase in the sterling at 0837 GMT against the US dollar, which brought it to a value of $1.21485. Meanwhile, the British currency was also able to strengthen against the euro, as it climbed by 0.2% to reach 85.970 pence.

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Meanwhile, the Bank of England has the huge responsibility of controlling the soaring inflation in the country and managing it without dipping the economy into recession. This has put the British pound on the path to recording its biggest drop against the green drop seen in six months after the year 2016, when the Brexit referendum had been conducted.

Market analysts said that there were too many headwinds in the UK in terms of the economy. The saving buggers of UK households appear to be very low and there is no such fiscal support. Plus, the deficit in the current account is now expected to double in 2022.

Disappointing data

On Thursday, data showed that Britain had managed to reach a record shortfall in the first three months of the year in its current account. The deficit grew to 8.3% of the country’s GDP, which put it at a value of 51.7 billion pounds.

Since December, interest rates have already been increased by the Bank of England about five times and their next announcement regarding the interest rates is scheduled for August 4th. There are some market players who expect the BoE to hike up the interest rate by 50 basis points.

Last month, inflation in the United Kingdom reached a high of 9.1%, which is the highest recorded in all of the G7 countries.

Dovish stance

However, Wednesday saw the expectations of a bigger rate hike by the British central bank temper, as a softer tone was taken by Andrew Bailey, the Governor of the Bank of England. He stated that it was not necessary that the central bank has to act ‘forcefully’ in order to rein in inflation.

The dovish stance of the governor of the BoE was also echoed by another incoming policymaker at the central bank, Swati Dhingra. She said that the tightening of monetary policy should be gradual because an economic slowdown is already coming sooner than expected. Thus, being aggressive may not be the way to go.

Market analysts said that while a rate hike of 50 basis points had been priced in, the chances of it were low now after the dovish comments. Meanwhile, the US Federal Reserve has already clarified that they have no intentions of slowing down their aggressive interest rate policy because they are going to do everything possible to control inflation. They have acknowledged that a recession could happen, but believe chances are very low as the economy is strong enough to handle it.

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