The pound has been rising but can this continue
Expectations for the pound to carry on rising remain fairly high in the FX markets as sterling has continued to touch fresh highs.
Against the Euro we have been comfortably in the 1.17s, and against the US Dollar 1.29. GBPEUR levels are an 11-month high and GBPUSD levels are testing 16-month highs.
The outlook for sterling has increased and improved as investors back further interest rate hikes in the future.
Typically the raising of an interest rate sees the relevant currency stronger, as it attracts further investment.
When we look at the future forecasts on interest rates, we see that markets are predicting UK interest rates over 6%.
What could destabilise sterling?
If we look further into the future, we can see a number of potential issues which could upset sterling exchange rates.
The potential for higher interest rates to trigger recession is documented as it stops spending.
This has been quite well researched and the now increased chance of interest rates hikes, makes a longer and deeper recession more likely.
In fact, when the Bank of England raised interest rates last month, the pound did fall.
Some research I had looked at regarding the pound and Bank of England interest rate decisions, did actually show that in the 24 hours following these events, the pound was lower.
So, the very thing that is causing the pound to rise in principle, is actually and could very easily cause it to fall.
Looking around the corner, we never quite know what the financial world and FX markets will deliver.
The movements we see are ultimately just a reaction to investor’s sentiment towards the ongoing news and current affairs.
For now, sterling is performing well and this is presenting an excellent opportunity for those buying Euros, US Dollars or many other currencies.