By Grace Smyth
Following the highs sterling reached against the Euro in recent weeks we have this week seen the pound take a step back, and it would seem that pressures are back on. The recent interest rate hike from the Bank of England to 5% failed to bolster the pound much further. Markets experienced a knee jerk reaction but ultimately digested the news and rates started to reverse. The drop in rates particularly against the euro came as expectations to raise interest rates in the Eurozone increased. Much like the UK, the eurozone is also dealing with a stubborn inflation issue meaning just like the BoE, the European Central Bank is likely to continue to raise interest rates to battle inflation with recent comments made by Christine Lagarde reiterating this. With both sides facing similar economic challenges, it’s making it difficult for one side of the pairing to dominate.
But raising interest rates is positive for currency right? Historically yes, raising rates would bolster a currency as the higher interest returns are attractive to investors for obvious reasons. However, when paired with increasing pressures elsewhere, such as soaring inflation, there is then a real fear that raising rates rapidly essentially speeds up and puts an end to a hike cycle much quicker than planned, and could open doors to further economic slowdown in the future, which in turn puts pressure back on that currency. This is what we could be experiencing in the UK right now and with speculation of another hike in August already looming, it’s a tough call to know if the Pound will benefit or not in the coming months.
That being said, it’s important to realise the real dangers that lie ahead. It’s easy to believe that with rates seemingly improving overall that this trend will simply continue, but the currency markets are fickle and hard to predict. So don’t get caught out. With rates currently sitting at close to the best trading levels (certainly against the euro) in recent weeks, now could be a great time to lock in your currency requirement.
A new month ahead brings with it fresh data releases which have the ability to sway exchanges rates. If you have international transfer looming in the coming days, weeks or months, then get in touch with us to speak with a member of our friendly team to discuss the options we provide to help you lock in and secure your currency requirement to best suit you.