Will the pound rise higher if interest rates go to 6%?

Sterling remains near 2023 and yearly highs but could be under pressure

Pound sterling has risen to fresh highs in recent weeks and months against both the Euro and US dollar, as well as the Aussie dollar and many others.

This improved outlook has largely been the result of interest rate hikes, as well as feeling that ‘things are not quite as bad as initially expected’.

When we began 2023 the market and commentary by the experts was largely negative, with a long and protracted recession predicted.

Well, the UK has avoided the recession – just, but the pound could be at risk further ahead.

The reason for this potential weakness, is the reason for its own strength, that of a higher interest rate.

Higher Interest Rates Strengthen Currency But Slowdown Spending

As regular readers of pound sterling forecast will know, a higher interest rate usually attracts more investment into a currency.

This is something we have written about previously here. With interest rates being higher, the pound has risen as investors buy UK and sterling denominated assets for a greater return.

So, in practice the economic theory of higher interest rates influencing a stronger pound have proved true.

However, last month’s latest UK Interest Rate decision did see the pound weaker, as investors became fearful regarding the economic outlook.

At some point, these higher interest rates will bite into the wider economy. A higher base rate means less spending in the wider economy, as consumers and business are more inclined to save.

Mortgages are a topical point too, since higher mortgage rates influence the millions with home loans, and by putting extra pressure on what they can borrow, it reduces their spending.

Why is sterling is at risk of falling ahead?

The reasons are a slowdown in the economy, and the prospect of a recession. The difficulty the Bank of England has, is that most mortgages are fixed deals and the rate rises are not instant into the wider economy.

We could therefore be looking at a cliff edge at some point, where millions have to renew at a much higher level.

Bank of England research shows that 1.3 million households will need to renew by the end of this year, so the coming weeks and months will potentially start to see the bite of these higher rates.

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