By Tom Arnold
Last week the currency markets were primarily focused on the various major central banks and their monthly policy decisions specifically relating to interest rates. Interest rates are important to currencies as higher interest rates encourage the purchase of a given currency, as investors seek higher yields, and lower interest rates conversely generally lead to a weaker currency as investors move their higher-yielding positions elsewhere.
The current situation with major interest rates is:
BoE – 3.75%
ECB – 2.0%
Fed – 3.5%-3.75%
Both the Bank of England and the Federal Reserve have cut interest rates in the last two weeks, which should be negative for both currencies, and therefore the Euro is the likely winner. That isn’t exactly how it played out last week though, when the BoE cut their interest rate, with the Pound actually strengthening after the announcement. There were two reasons for this though – firstly the markets had been anticipating an interest rate cut for quite some time and so the decision was already priced-in to Sterling’s strength in the past weeks. And secondly the vote amongst the decision makers was much closer than anticipated – with only a narrow margin of 5-4 in favour of the cut. This points to less certainty in the ongoing chance of future cuts, which had been widely anticipated, and so led to some unexpected Sterling strength.
However UK inflation was lower than expected when its most recent reading was released earlier this month, and so the BoE definitely has scope for further rate cuts and a desire to make them to stimulate growth in the UK economy, so this close vote likely leads to simply a difference of opinion on the timing of the future cuts, and therefore more of a short term spike in Sterling’s favour rather than a change in trend.
This does present a potentially good buying opporunity for those with Sterling in hand and an upcoming currency purchase over the fesitve period or in the early part of 2026. Contact your currency consultant today to find out how we can help you to take advantage.
The week ahead is dominated by the Christmas holidays, however we have already had a UK GDP figure this morning – as expected at 0.1% QoQ) and 1.3% (YoY) – and a raft of data from the US tomorrow, including their own GDP figure, durable goods orders and industrial production.
At this time of year the markets can be volatile as ‘thin trading’ – much less volume in the market – can lead to bigger reactions when certain events happen, so stay in touch with us at A Place in the Sun Currency to help us to help you to make your money go further.