Sterling challenges higher exchange rate levels

The Pound continued its remarkable unexpected rally yesterday, finishing the day at its best level against both the Euro and US Dollar in over a month. There were also gains against the Australian, New Zealand and Canadian Dollars. Mid-market levels of €1.40 and USD 1.50 were seen in later afternoon trading, both significant milestones for cheaper currency for those of you sending money abroad at the moment.

Sterling’s strength was despite continued uncertainty surrounding the General Election, and indeed yesterday’s Bank of England minutes, which showed that UK interest rates are likely to remain at record lows of 0.5% until mid-2016. Low interest rates usually mean a weaker currency, but the view that the British economy has reached “escape velocity” according to the influential Ernst & Young ITEM club, is a sign that perhaps markets consider that economic growth will continue even in the case of an unstable government after the May 7th election.

The Bank of England Minutes were more upbeat than generally expected, with inflation seen as likely to pick up later in the year, rather than any significant concerns about a dangerous cycle of deflation. “They seem to be talking up inflation prospects. Sterling has risen above $1.50 and could stay there for a couple of days but given the election uncertainty, I wouldn’t expect it to stay there for long”, said Richard de Meo, managing director at Foenix Partners.

If we might add our own word of warning, last time we saw GBP-EUR and GBP-USD at their current levels, exchange rates proceeded to drop rapidly, by around 4% for the Euro in 2 weeks, and 2% for the Dollar in a few days. Will we see sustainable gains this time around, or will the Pound retreat back in the coming days?

Nobody knows of course, but we do have UK retail sales figures this morning at 9.30am, and more importantly next week the first estimate of GDP growth to the end of March, before the General Election the week after.

It would seem that the risk for the Pound is therefore more to the downside, given that we have not seen significantly better exchange rates against the Euro in particular in some years. “I can’t see a massive sustained rally with so much political uncertainty,” said a spot trader. “The election concerns will keep sterling rallies limited.”