The pound is anchored to current buoyancy levels due to the uncertainty surrounding Brexit and the lack of stability in Government. I am of the opinion 1.15 will be a resistance point on the GBP/EUR exchange rate. With many Euro purchasers setting that as a target rate of exchange I would expect profit taking to take place when 1.15 is hit and the market will readjust. A wise trader may set their sights slightly lower.
Why did the Bank of England raise interest rates?
I currently have little confidence in the pound due to the UK economic uncertainty created by the vote to leave the EU. The interest rate hike was negligible, with no basis, a knee jerk reaction to the problems with inflation and it is a coin flip as to whether it will have the desired impact. Even the positive data out of the UK could be considered tenuous. Unemployment being lauded as the best since the 1970’s is skewed as it has only recently incorporated zero hour contracts.
The inflation situation is understandably worrying as it currently sits at 3% and average wage growth is dwindling behind at 2.1%, which is worrying and certainly not the kind of data you would like to see when hiking interest rates. I believe this is exactly the reason that the Bank of England were so dovish in the statement that followed the rate hike. Stating that they expect there to be very few further interest rate increases over the next three years. Adding more price pressure to the UK consumer is not what they want, they simply must feel the need to try and curb inflation quickly before it gets out of hand.
Why has Sterling gained against the Euro
I believe the main catalyst for Sterling’s gains against the Euro was the Catalonia situation and had little to do with Sterling strength. Keep a close eye on events as they unfold as this does have the potential to cause volatility on the markets. Some banks have already begun to move to Malaga should a recognised referendum take place. Although there is the clear fear that Catalonia could hit Spanish GDP, the real danger is that this could cause a domino effect in other areas of the EU and cause them to consider leaving.
If you are buying Euros short term it may be wise to take advantage of current levels, there is clearly the potential for Sterling to fall back from its recent advances.