By Ashley Finill 
This week Sterling continued its strong rally against the Euro, gaining nearly 1% over the last few days and reaching its strongest levels since May last year. Encouraging UK economic figures and continued uncertainty across Europe helped support the Pound.
The first boost came on Tuesday following stronger than expected UK employment figures, which showed unemployment unexpectedly falling to 4.7%, compared with forecasts of 5.0%. Wage growth also exceeded expectations. This was followed by Wednesday’s inflation figures, which showed prices rising by 3.5% in September, up from 3.1% in August. Although higher inflation continues to put pressure on UK households, the figures have strengthened expectations that the Bank of England are likely to raise interest rates at its next meeting in November, providing further support for Sterling.
Meanwhile, the Euro has struggled due to ongoing political and financial uncertainty in France, where concerns surrounding government borrowing and rising debt costs have been crippling the country, and saw mass rioting in the last few weeks. Despite the Pound’s recent strength, analysts have warned that the rally could be starting to lose momentum following several weeks of gains. This raises the possibility of Sterling giving back some of its recent improvements, particularly with next week’s UK Budget approaching.
Over the past couple of years, we have seen several major leaks in the days and weeks leading up to the Budget, giving markets an indication of what to expect. However, this time around, with a new Prime Minister and Chancellor of the Exchequer, things have been much more tight lipped. There is no doubt that changes are needed to help tackle rising inflation and ease the pressure on households, but any measures introduced are likely to come at a cost elsewhere. This could mean further tax increases, as we have seen in previous Budgets, which could put pressure on the Pound if markets react negatively.
With the Budget now just six days away, any reports suggesting significant tax rises could quickly bring Sterling’s recent rally to a halt and potentially send the currency into reverse. Should you have a requirement for currency in the coming months, now could be a good opportunity to consider your options and take advantage of Sterling trading around its strongest levels in 18 months.
Sterling Gains Ahead of Fed Decision
Sterling has also made gains against the US dollar this week, strengthening by around three quarters of a cent, as stronger UK economic, as data already mentioned, helped improve confidence in the Pound across the board. The Dollar has also experienced periods of weakness, although ongoing uncertainty and tensions in the Middle East continue to influence investor sentiment. Attention will turn towards next week’s Federal Reserve interest rate announcement, with investors looking for clues about the future direction of US borrowing costs. Any unexpected announcements could lead to further movement between the Pound and Dollar.
Today and Next Week
Today there are important data releases to take note of, one of which has already happened – UK retail sales, which fell by 0.4% from August. Although this is would usually be negative for Sterling, it has held strong, with no shift in the market since the announcement at 7am this morning. At 9am, the Eurozone posts PMI data and the UK follows at 9.30am so we could see some volatility in the early morning trading. In the afternoon, Canada posts retail sales at 1.30pm and the US close the day out posting PMI data at 2.45pm.
As mentioned, next week is shaping up to be an important one for currency markets, with the UK Budget taking place on Wednesday, alongside the Federal Reserve’s interest rate decision. The European Central Bank will then announce its latest decision on Thursday.
With Sterling having enjoyed a strong period against the Euro, next week’s announcements could determine whether the Pound can maintain its recent momentum or whether some of those gains begin to unwind. As always, stay in close contact with your currency consultant to make your money go further.