Will the Pound be frozen out or are the BoE about to heat things up?

By Matthew Boyle

For the last six months we have seen GBP/EUR rates trade up and down within a 2-cent range with the market at times seemingly frozen. With global markets in disarray and whilst war and natural disasters dominate the news, uncertainty seems the only certainty. With its high liquidity and the resulting safe-haven status, it is perhaps little surprise whilst the Pound and single currency remain in seemingly endless tug-o-war the US Dollar has been the main winner. But as the cold weather begins to set in it looks like things are about to heat up with the greenback a driving factor as to whether it will be GBP or EUR that wins the battle and if rates will break up or down from ongoing range-bound trading.

It is a surge in gas prices combined with a surprise uptick in US inflation that has put renewed pressure on the Bank of England to raise interest rates again, something that would bolster GBP strength. Last week news emerged of a surge in gas prices from £89 a therm to £140 as demand is due to increase following forecasts the remainder of this month will be colder than expected and as conflict in Ukraine and Israel drive wholesale prices higher. With this set to drive global inflation higher last week the US reported higher than expected Core services inflation which will encourage the already bullish fed to raise rates again. This in turn only mounts pressure on the BoE to hike rates to keep pace with the Fed as the UK is a net importer of USD goods and much of our government debt is serviced via USD – the result being essentially the USD exports inflation to the UK.

The combination of US inflation and increased gas prices have opened the door once again for further interest rate hikes by the BoE and with it, movement in exchange rates.

But will a surge in gas prices result in an increase in inflation or simply squeeze UK household budgets and spending lower which would bring inflation down? And will US inflation also trigger the ECB to raise rates too thereby simply maintaining the ongoing deadlock between GBP/EUR?

With the release of UK unemployment on Tuesday and inflation data on Wednesday this will without doubt provide a big indication as to which way the BoE and rates will move In the short-term. With certain uncertainty ahead and GBP/EUR rates looking set to break it might be prudent to look at options to safeguard your rate and protect your costs.

So if you are considering purchasing your own place in the sun or have an upcoming currency requirement speak too your consultant today who can provide you with professional and friendly guidance and help make sure you don’t get left out in the cold when it comes to transferring your money.