Will GBP Sink or Float?

By Matthew Boyle

In recent weeks we have seen GBP-EUR rates strengthen making new 2021 highs and currently close to the best they have been in almost 2 years. The Strong USD has helped this as whilst it has pushed GBP-USD rates down, it has weakened the single currency and aided the Pound’s gains. Whilst the onset of colder weather brings with it the potential of Covid spikes and shutdowns, the main driving factor for GBP rates currently is the Bank of England and the UK interest rate decision.

Suggested by some it would be hiked last month, this was not the case. Since then, we have seen inflation levels begin to rise dramatically only increasing the calls and urgency for action to be taken and as such is bolstering GBP rates currently.

Downside risk to the Pound is present with the supply chain issues we have been warned about and many expect. However, a supply chain squeeze and reduction in available product would squeeze prices and add to inflation increasing the need for BoE interest rate action.

To complicate matters further, analysts are suggesting the due to the speed of inflation rising a hike in rates would only change the nominal interest rate i.e., that on paper.

And that due to the speed inflation is rising the proposed hike action would at best balance inflation in the very short term and have little or no impact in real terms.

In what is such a huge economic driver and one which will impact so much GBP faces a tough time ahead. Without doubt we will see BoE action and a hike to rates. But will this come next month or next year?

And will supply chain issues squeeze rates down before this? Will the hike have a true impact or just a nominal one? And because of this will the Pound continue to float up or will it sink due to nominal impact?

Speak to your Broker today for some guidance on how to reduce your risk in these uncertain market conditions.