Sterling jumped to its highest level post referendum against the US Dollar today, as markets fully priced in the possibility of a interest rate hike in the UK sometime in the coming months. The possibility of a rate hike is now very real and is reflected in Sterling’s current value.
The Bank of England met yesterday and although there was no change to policy for now, a more hawkish tone, even from some usually dovish members helped to ensure the Pound rallied and finishes the week as one of the best performing major currencies.
The Pound has also found support away from economics, as progress seems to have been made with Brexit. The UK is still looking to secure a status quo deal after March 2019, when the UK leave the EU. Prime Minister Theresa May is set to make a key note speech in Florence next Friday, as we enter the fourth round of negotiations. This is likely to be a key mover for Sterling next week, as week as retail sales figures and public sector finances. I personally feel as though the Pound has broken through the consolidation level of 1.35 and will now comfortably stay there well into next week.
As for the US, similarly with the UK, it’s a double edged sword of economics and politics. Geo-political tensions mean that the risk aversion is high as North Korea continues to prod President Trump.
It seems as though a reaction is only a matter of time and could cause major volatility across the global markets, not just cable exchange rates. The main driver for USD weakness at the minute are the reports that a December rate hike is questionable from the Federal Reserve.
A key mover for the Dollar next week will be the Monetary Policy announcement next Wednesday. The recent hurricanes which have caused widespread impact, as well as potential conflict with North Korea are likely to have an effect on the Fed’s rate decisions for this year. The key for Dollar strength or Dollar weakness will be the insight into future rate hikes next year.