Tipping point for the Pound?

By Matthew Boyle

The last few months have seen GBP rates operate within relatively tight ranges, in particular GBP>EUR which has been up and down within 2 cents for several months now.

The recent Bank of England interest rate hike combined with a currently weak Euro has seen rates slowly squeeze up the past week, within half a cent of the best buying levels we have seen in around 8 months. The high interest rates in the UK have seen a flurry of activity in the Bond and Gilt markets due to better returns and has no doubt helped the Pound reach these current levels. Data this week has also seen the UK current account deficit drop to much lower levels than expected. The figure which essentially shows the difference between earn and spend on goods and services has dropped from 7.1% in Q1 2022 to now 1.7% in Q1 2023. Again, largely due to higher interest rates as everyone tries to remove debt to battle higher costs, meaning the Pound should remain more robust to a potential incoming recession. This being the main fear currently as higher rates pile pressure on borrowing in particular the UK housing market.

And with the Bank of England next meeting at the beginning of August it seems at least now that those fears will grow.

However, it should be noted it is widely agreed the BoE will hike again in August with rates expected to reach 6% + by the end of the year. And as the months roll on more and more homeowners’ and borrowers’ mortgage products will reach renewal – the result being a huge increase in the cost to maintain their mortgage and essentially retain ownership of their houses. The attraction of high bond and gilt yields can only seem so attractive set against the implosion of the UK house market and the ramifications this would have. And as the clock ticks and the inevitable interest rate rises get closer it seems perhaps just a matter of time before the demise of the Pound and these current rates. With the August BoE decision creeping closer it is likely the market will begin to position for an incoming hike and the effect –  rates lowering as borrowing pressure increases. The question is when will the market start to reposition?

With the Euro slightly weak at present due to some poor recent data, an improvement here combined with the potential shift in sentiment for the Pound could mean the current near 8-month high rates are not available for much longer.

With USD earnings and unemployment data dominating the market today during the afternoon session speak to your consultant today to take advantage before we see what might be an avalanche type slide for GBP rates.