Tomorrow is arguably one of the most important days for the pound this month with the latest Bank of England interest rate decision. Investors will pay close attention to this event to determine the latest twist and turns in economic policy, and it can shape behaviour of the relevant currency.
Typically, the raising and lowering of interest rates by a central bank will lead to changes in sentiment towards that currency, by making it more or less attractive to hold. This is in a similar way to a higher or lower savings bank account interest rate making an account more or less attractive.
Looking to Thursday of this week, the Bank of England are predicted to raise interest rates by either 0.5% or 0.75%, which would potentially lead to sterling strength, by increasing the return investors would get on GBP denominated assets.
If we look to the latest trends for interest rate policy in the UK, interest rates are now at their highest since 2008, with the Bank of England embarking on a fairly aggressive hiking cycle to combat the negative effects of inflation.
Inflation is still remaining high in the UK, so the arguments for a higher base rate continue. The key question is at what point will inflation peak, and therefore at what point might interest rates peak.
Investors will often make their moves on currency ahead of an event to take advantage of any price discrepancies with a view to profiteering if the market goes they way they are anticipating. We do also see movement on currency after an event, once investors have the news to be able to make an informed decision.
Sterling is trading close to some of its highest points in months against both the US dollar and the Euro, so Thursday’s data tomorrow could be crucial to laying a path and setting the agenda for where we are headed next for the pound.
If you have any FX transactions to consider, and wish for some market insight to help you better understand what happens next, please contact myself Jonathan on [email protected]