Pound hits monthly highs against the Euro and Dollar – will the rise continue?

Pound hits monthly highs against the Euro and Dollar – will the rise continue?

Sterling rose to monthly highs against a number of its major counterparts during yesterday’s session following stronger than expected inflation data. The pound rose against both the euro and the dollar during the most positive session of the year for the currency.

A transfer of £200,000 is buying €4000 and $11,000 more than the low of the last four weeks.

ONS data showed that UK inflation dropped from 10.7% to 10.5%. Inflation has dropped for the second successive month in the UK but remains highly elevated. UK inflation appears to have peaked in October at 11.1% but remains at 40 year highs. The markets now expect the Bank of England to continue combatting inflation with another interest rate rise.

In general a rise in interest rates lends support to the value of a currency which is why the pound has increased in value following the high inflation reading. If yesterday showed inflation was reducing at a quicker pace than anticipated we most likely would have seen the pound lose value during yesterday’s session.

US inflation has been dropping at a quicker pace, recently falling from 7.1% to 6.5%. US inflation peaked in June at 9.1%. The dollar has lost value against the euro and the pound in recent weeks, notably a week ago today when US CPI data was released.

The next Bank of England meeting in February will be a key event for rates moving forward. Markets will begin to price in a 50-basis point hike over the coming weeks. In the short term, tomorrow morning, markets will digest the latest retail sales data. A surprise increase in data for December could push the pounds value higher. Consensus is for a 0.5% increase following last month rise of 0.4%.

If you have an upcoming currency requirement and would like to be kept informed of developments, please feel free to contact me directly on [email protected].We have a number of tools available at Lumon to help minimise currency risk.