The Bank of England is expected to hike interest rates once again on the 21st of September, bringing the base rate of interest up to 5.5%. This would be a 15th consecutive interest rate hike from the central bank, with the rate currently sitting at a 15-year high.
Throughout the year the increasing rate hikes have helped push the Pound higher against most currency pairs, and the Pound was the strongest performing currency of the G10 in the first half of the year.
Expectations of further hikes have been downgraded though, and this has had a knock-on effect to the Pound’s value especially against the US Dollar.
Previously, economists were pricing in hikes of up to 6% and potentially higher although the outlook has become more bearish in recent weeks. The Governor of the Bank of England, Andrew Bailey recently said that the BoE is ‘much nearer’ to peak interest rates and this comment has swayed opinion on the BoE expected plans for future interest rates hikes.
The impact on GBP exchange rates has been very clear especially in regard to GBP/USD. The pair are currently trading around a 3-month low and last week they fell below the 1.2500 psychological level. This is over a 6-cent drop from the highs in summer and shows GBP weakness.
Whilst the Pound hasn’t dropped by much at all so far against the Euro, if the GBP/EUR pair follow the pattern of GBP/USD there could be some distance for GBP to fall.
The expectation now is for next week’s interest rate rise to 5.5% to be the last one after the comments by governor Bailey. I think the key topic after that hike will be how long the markets expect to see the interest rates up at these elevated levels, and this could determine the Pound’s strength or weakness moving forward.
