Will the expectation of higher interest rates push GBP exchange rates even higher?

GBP AUD Dips Again Ahead of BoE Rate Decision

The Pound was the strongest performing currency in the first half of 2023, after gaining by almost 5% against the US Dollar and by almost 3% against the Euro.

Although Sterling exchange rates dropped yesterday as the second half of the year began, it’s been a very strong first half of the year for the Pound as the expectation of higher interest rates continues to climb.

After dropping to almost parity in the wake of former Prime Minister (Liz Truss) haphazard budget last September, the Pound to US Dollar exchange rate has climbed to 1.2700 which demonstrates how strong the recovery has been for Sterling. It’s also climbed from 1.0840 to 1.1640 against the Euro during this time.

The gains are a result of the Pound becoming a more attractive currency to hold assets in, as the Bank of England has hiked interest rates on 13-consecutive opportunities pushing the base rate of interest up to 5%.

Some financial commentators have questioned whether the hikes, and anticipated future hikes have run their course when it comes to Sterling strength.

Something to factor in though, in my opinion is the expected peak continues to climb. Some speculators within the City are betting that rates will peak at 6.2% in mid-2024 which is an increase from the previous expected peak of 5.5% by the end of 2023.

Within the developed economies the UK inflation levels are highest which is the reason behind the aggressive rate increases by the Bank of England, as they try and counter the increasing cost of living.

The current rate of inflation is 8.7% and core inflation is above 7% so both figures are well above the BoE’s target of 2% which is why interest rates have continued to climb, pushing the Pound higher.

Economic data releases are very quiet today especially as there is a public holiday in the US today (Independence Day). Sentiment is therefore likely to be the main driver of currency fluctuations so do register your interest if you wish to be updated regarding GBP exchange rate fluctuations.