By Matthew Boyle
The Pound is currently flying – trading at multi-year highs against several currencies after escaping Omicron relatively unscathed, and following earlier than expected Bank of England action when they raised interest rates last December.
Against the Euro it is currently close to a 2 year high for buyers, a level we have only matched three time in the last 5 years. Rates were almost 3 cents lower at the beginning of December but following the BoE hike the Pound has continued to be bought, pushing GBP rates up, ahead of anticipated further hikes in the interest rate. Despite early action from the BoE the December hike had no impact on abating rising inflation as figures rose from 5.2% to 6% in January.
Consequently, it looks almost a certain we will see a hike when they meet tomorrow, the real question is by how much. Many expect a rise to 0.5%, however some have suggested we may see a hike to as much as 1.5% to counteract the current out of control rise in inflation.
With some analysts suggesting we are on course to see inflation over 7% this month this shouldn’t be ruled out. The real question is whether the BoE will take swift and aggressive action tomorrow or will take a slower and more measured approach.
And of course, their decision and approach will have a huge impact on GBP exchange rates. It is impossible to gauge how much of the hike is currently priced into rates, but with 0.25% expected by most it is unlikely we will see the Pound surge should this happen. Anything more than 0.25% though and we may see the Pound make a breakthrough upwards and out of the recent range it has been trading within.
Whilst the Pound is strong don’t ignore the potential downside risk to the rate. With a hike heavily priced in and perhaps at a higher-than-expected level, should the bank of England stall due to the UKs economy starting to over perform again expect rates to drop.
If they hike as expected to 0.5%, we may see sideways trading continue, and with mounting pressure on Boris to bow-out, should this happen then rates would almost certainly be pushed down.
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