Much of the Pounds price fluctuations this year have been driven by increases in interest rate hikes along with expectations of additional interest rate hikes in future.
The Bank of England (BoE) has hiked interest rates 14-consecutive times since December 2021, and this has taken the base rate to its highest level in 15-years. The base rate of interest currently sits at 5.25%.
Those of our readers planning on making an exchange of Pounds into another currency have benefited from the bullish approach from the BoE, as the Pound has been the strongest performing currency within the G10 through 2023.
The expectation from city traders and the bets they place has been that the base rate will climb to 6% by the end of the year.
This outlook changed last week, as on Wednesday data showed that there has been a slowdown in business activity in both the services and the manufacturing sectors. Services is a key industry for the UK as it covers roughly 80% of the UK’s economic output.
The Pound has its largest daily drop against the US Dollar the day after this release, and analysts have now amended their interest rate expectations for 2023. It’s still expected that there will be another hike in September bringing the rate up to 5.5%, but the futures markets is betting that there’s just a 1 in 3 chance that rates will hit 6%. Prior to last Wednesday’s PMI releases there was over a 50% chance of 6% being reached by the end of the year.
Usually, this change in sentiment would negatively impact the Pound but so far it’s remained resilient against the EUR, although the drop against the US Dollar is noticeable.
The economic calendar for the UK is very light this week, so I expect GBP exchange rates to be driven by sentiment. GBP/EUR is trading just 1-cent from its 52-week high now.
