The pound rose to fresh highs against the Euro and US dollar yesterday, on expectations the Bank of England will need to raise interest rates further and sooner in the future.
In stating the Bank of England will need to “see the job through” in referring to tackling the UK’s stubborn inflation problems, financial markets are insinuating a rate hike at May’s next Interest Rate decision.
Huw Phill, the Bank of England’s chief economist was speaking in Geneva, and whilst his comments were a trigger for the move on GBPUSD to a best time in 10 months at 1.25, and a GBPEUR boost to nearly 1.15, not far off the best this year and since Christmas, the path forward is not clear cut.
Silvana Tenreyro was less positive about further interest rate rises, citing concerns that UK economic growth could be hampered by the current high level of 4.25%, and looking further forward and anticipating interest rate cuts sooner than markers expected.
The raising and lowering of interest rates is typically a key factor in the assessment of a currency’s strength, and with the UK base rate now expected to raise higher and sooner, markets have backed Sterling.
The fresh moves on Sterling were not just down to independent movements for GBP. The US dollar accounts for 60% of globally traded foreign exchange and in softening in trade, was a contributing factor for the move on GBPUSD which ultimately lifted the pound against other currencies.
It is important to note the role of the US dollar in considering FX movements. The next most traded currency after the greenback is the Euro at around 20%, with sterling coming in around 5%. This is key because movements on the US Dollar can amplify movements on other pairings.
The ‘weight’ of the US dollar in the FX markets, means it will drag, push and pull less heavy currencies around. Client closely monitoring events in the UK which might influence their GBP trades should also consider this, since as we can see the pound is not as strong so news on the Euro or US dollar can be more influential on GBPEUR movements than the pound itself.
If you have an FX transaction to consider involving the pound and wish for the latest news and information to help you make informed decisions then please do get in touch to discuss further.
Thank you for reading,
Jonathan
