Pound Pushes Higher

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Market Rates at Publication:
GBP/USD: 1.3822
GBP/EUR: 1.1866

The British Pound pushed back towards its recent 20-month highs against the Euro and was at its highest level in a month against the Dollar on Tuesday.

Advances came amidst a broadly supportive global investor sentiment backdrop and an anticipation of higher UK interest rates.

The Pound is a currency that tends to benefit when stock markets are rising and global investors are in a risk taking mood, the Euro and Dollar tend to benefit when the opposite is true.

As long as markets continue to recover from their September slump weakness in the Pound could prove shallow.

A UK-specific boost to the Pound comes as traders bet the Bank of England will increase interest rates from record lows as soon as November.

"Pound crosses are continuing to shine brightly today as investors increase their expectations over an imminent interest rate hike in the UK," says Fawad Razaqzada, Market Analyst at ThinkMarkets.com

Bank of England Governor Andrew Bailey said at the weekend the Bank "will have to act" to keep a lid on inflationary pressures.

Above: Daily GBP/USD chart (top) and daily GBP/EUR chart (bottom).

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The prospect of a higher Bank Rate pushes up the cost of borrowing through the economy, increasing the return on UK financial debt assets which draws in foreign investor capital.

The Pound to Euro exchange rate went as high as 1.1868 on Tuesday, taking it just shy of the Friday 2021 high at 1.1870.

The Pound to Dollar exchange rate went as high as 1.3833, a one month best for those selling pounds.

"Thanks to the renewed bullish momentum, traders are buying the pound across the board," says Razaqzada.

Razaqzada says Sterling’s best gains will be observed against currencies where the central bank is still quite dovish, such as the yen and franc.

"Although the GBP/JPY has already risen sharply, the GBP/CHF hasn’t made its move just yet and it appears to be just warming up. Like the Bank of Japan, the Swiss National Bank is nowhere near ready to tighten monetary policy. If anything, it continues to warn that the franc remains overvalued," he says.

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Some foreign exchange analysts have expressed skepticism as to whether the British Pound's recent gains can extend on a sustained basis, warning that now could in fact be the time to sell the currency.

In the view of critics, higher UK interest rates will slow growth down further and contribute to an environment of rising inflation and stagnant growth, which is unsupportive of the Pound.

"Fading Sterling strength on a BOE hike sounds like a good tentative idea in our view," says Anders Eklöf, a foreign exchange strategist at Swedbank.

"Sterling is unlikely to get lasting support from the BOE raising rates because of supply constraints and already tight labour markets," says Eklöf.

A number of economists have come out to warn that raising interest rates when growth is slowing could only exacerbate slowing growth, leaving the Bank of England guilty of an error in judgement.

Some foreign exchange analysts are increasingly leaning on this line of thinking to justify calling for a weaker Pound going forward, warning that the recent gains are unlikely to be enduring.

"We reiterate our warning that UK money markets have gone ahead of themselves discounting an aggressive BoE tightening cycle to start soon, as any reversal could in turn weigh on the GBP," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

Economist David Blanchflower, a former Bank of England Monetary Policy Committee Member, says raising rates soon would be a "disaster".

He told BBC Radio 4 that such a move is "foolish" as price rises coming through the system now are almost certainly "terribly temporary".

Interest rates are currently at an historic low of 0.1% but economists warn inflation could be on course to peak at 6.0%, which would prove ruinous in itself.

The Bank of England therefore feels it has to be seen to be acting on inflation.

Another former MPC member Andrew Sentance was however scathing of Blanchflower's view, saying: "How can we take Danny Blanchflower seriously? U.K. inflation is heading to 6 percent and he urges that interest rates are kept at a record low of 0.1 percent. He has no understanding of monetary policy."