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Sterling received a sharp boost as soon as markets opened for the start of the week. Markets are following developments in the discourse over interest rate hikes and the Pound’s value has been swinging wildly as a result. The prospect of raising interest rates promises greater returns for investors, and after years of record lows globally even the smallest hint that such a rise is on the horizon causes demand, and therefore value, for Sterling to increase or decrease depending on how positive the outlook.
Over the weekend we received a more positive tone than we have heard emanating from the Bank of England recently. So much focus has been on inflation in the UK, which has been at record lows and well-off their target of 2%. Low inflation decreases the incentive to spend, which fed recent dovish tones from the BoE as raising rates is another brake to spending which the UK economy may not be able to afford. BoE policy maker Kristin Forbes made clear her stance on what necessary targets would have to be met for an interest rate rise to occur.
Forbes stated that the effects of a rate hike are not fully-felt for one to two years following their implementation. She iterated that ‘waiting too long would risk undermining the recovery’ as holding down rates as these prolonged lows could ‘create distortion’. Effectively they could raise rates ahead of the target 2% being reached, if they are confident this will be achieved within a two year period of a hike’s introduction. David Miles, another BoE Monetary Policy Committee member had voiced similar opinions last week.
The emergence of support for Miles’ opinions shows that the recent 8-1 vote against a rate hike by the MPC was not reflective of current support for a rate-hike in the short term, and as a result Sterling gained against most major currencies yesterday morning.
Today’s release at 9:30 GMT of inflation data for the UK economy will be the key highlight for Sterling value over the next week of trading. Due to the above, inflation figures will not have to reach the high previously forecasted to suggest a change to the base interest rate. As a result there is increased likelihood for Sterling strength this morning and tempting opportunities for buyers of all major currencies.
If you would like to learn more about the factors affecting Pound exchange rates or are looking to exchange Pounds or transfer money abroad, please feel free to contact me directly at firstname.lastname@example.org or call me on +44(0) 1494 725353.
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