Sterling looks likely to breach €1.18 today – if it hasn’t already by the time you read this – and is also looking stronger against the US dollar too. That will be the highest rate it has been since February 2020 and 7% stronger than this time last year.
The reason for sterling’s support is that whereas bad economic news tends to weaken a currency, several of the UK’s woes concern inflation. In order to control inflation the Bank of England can be expected to raise interest rates. That means that sterling is bought on the currency markets and that raises the price.
The only problem with this scenario is that the Bank of England is extremely cagey about raising interest rates, which is intended to dampen the economy down, when we are still in a pandemic. Many businesses are also suffering under the burden of labour shortages and high costs such as for energy.
So, what happens next?
We are still three weeks away from the Bank’s Monetary Policy Committee (MPC) meeting on rates and in late September the vote was unanimous in NOT raising them. There are certainly hints that that could all change, and members of the committee will be keeping a close eye on the economic data.
This is a big early week for economic data, with retail sales, employment and earnings tomorrow, and Balance of Trade, GDP and various industrial reports on Wednesday.
That will be followed by speeches by a couple of members of the eight-person MPC that could give a much clearer view. If the mood appears to still be against rates rising we could well see sterling fall again.
That can only be guesswork at this stage. However, if you would like to lock this rate in – the highest for 18 months and well above the average for the past five years, do call your trader today on 020 8108 5337
