The pound had the wind in the back of a rising interest rate in the first months of this year. Although British interest rates are still rising, the focus on foreign exchange markets has shifted to the economic problems and the threat of another Brexit squabble.
In the financial world this week all eyes are on the central banks. On Wednesday, the Federal Reserve raised interest rates by three-quarters of a percent for the first time since 1994. Closer to home, the Bank of England (BoE) kept it at a quarter percent increase. That may seem like a small step, but it was already the fifth increase in six months. In 2022 alone, the intermediate position compared to the European Central Bank is 4-0 in favor of the BoE. After a good start, however, there has been little more to be noticed in foreign exchange markets in recent months of the British interest rate lead.
The pound fell below the €1.15 mark for the first time in a year. Just over three months ago, the coin was still worth over €1.20. Most often, such a decline is due to developments in the interest rate market. This time, the weakness of the pound is primarily a consequence of economic problems. Earlier this week, it became known that the UK economy contracted for the second month in a row in april. In the services, manufacturing and construction sectors, growth was negative. But the most worrying thing is the development of consumer confidence. That recently reached the lowest level since figures of this kind are kept. With the current level of minus 40, There are only two countries in Europe that are now scoring worse: Greece and the Netherlands.
The malaise for the pound took on a new dimension at the beginning of this week. British Prime Minister Boris Johnson has tabled a proposal to unilaterally amend Brexit agreements with the EU on trade with Northern Ireland. Of course, he was faced with a storm of criticism from Europe, but BoJo’s initiative is not very strange. He has tied himself in an impossible knot with the Brexit agreement he concluded more than two years ago. As part of this, there is a free movement of goods between Northern Ireland and (European) Ireland, with a safety net behind it a control in the Irish Sea.
At the moment, several cases are already running over the holes in that safety net. For example, the United Kingdom must quickly come up with a good statement on the absence of border controls in trade between Northern Ireland and the island. If that does not happen within two months, some very high fines from the European Supreme Court may follow. In view of these ongoing issues, the EU is waiting to step up political pressure through the official channels. But it is already becoming apparent that a new Brexit quarrel is a matter of time. And that’s extra fuel on the fire of the hot summer that the pound already seemed to be heading for.