Interest Rate Hike Speculation Fuels Pound Spike

19 September, 2017

Tom Arnold

tom arnold currency indexLast week saw a surprising turnaround in the fortunes of sterling, seeing the Pound spike, with UK inflation coming out higher than anticipated, followed by the Bank of England policy statement, which included suggestions from a couple of MPC members that interest rate hikes might not be too far away, and QE could be tapered. Higher inflation is typically combatted by interest rates hikes, and higher interest rates attract external investment, which in turn strengthens a currency. Tapering QE would also see the increase in the volume of Sterling slow, which is likewise positive.

As a result we saw the Pound spike up around four cents against the Euro and five cents against the US Dollar, and while the breakout from the recent negative trend was not complete, there was a palpable sentiment shift amongst analysts, who suddenly started talking up Sterling. With Bloomberg suggesting there was now an 80% chance of at least one interest rate hike by February 2018, and a 40% chance of the first coming as soon as November, the Pound soared.

Sterling has been languishing in a Brexit-negotiation trough for some time now, and all this good news allowed big gains, and provided a potentially perfect buying opportunity for those of you with Pounds in hand.

Carney Stymies Pound Surge

The problem with a surprise jump in the market, is that it often goes too far, as people get caught up in the momentum of the sudden spike. This leaves the gains exposed to corrections as trades are unwound and profit is taken. It also leaves the gains exposed to clarification, which in this instance came from Bank of England governor Mark Carney yesterday. Speaking at the IMF, Carney suggested that while interest rates are likely to rise, the raises would be done “gradually” and would be “limited”. He also warned of the “shock” Brexit was likely to cause the Uk economy’s growth, and how the new relationship with the EU would be “the biggest influence on the UK’s prosperity”. Full BBC article here.

While the positives of Uk interest rises are still there, this speech took much wind out of the sails of the resurgent Pound, with rates finishing the day down almost a cent against the Euro.

Pound Spike – Stick or Twist?

When there is a big jump in rates, it can cause such a sense of optimism that it is easy to lose sight of the gains made, on the asumption the market can only now go one way – UP! However yesterday highlighted very clearly how vulnerable a Pound spike can be. Let us not forget that a four cent increase in Sterling’s value against the Euro is approximately a £3,000 saving on buying €100,000. Can you afford to turn this down while chasing that extra inch? It could be a very long mile back down if Brexit takes centre stage again, with Boris seemingly hell bent on making it so.

Here at CI we have various contract options available to help you to secure your rate as quickly as possible, or far in advance of a requirement if you want to lock out market volatility. Make sure to stay in close contact with your account manager, so you know what is happening and what your options are.pound spike