The recent demise of Sterling has seen the GBP/EUR exchange rate close to falling below the 1.10 mark. So far there seems to be resistance which is holding the rate above this point, but is there a chance it may rise back above this point?
Last week the Bank of England caused over a 1% drop by reducing the hype of an imminent UK interest rate hike Only two of the Monetary Policy Committee members voted for a rise, with the final vote being 6-2 in favour of holding interest rates, down from the previous month’s vote of 5-3.
Could Sterling strength follow UK inflation data released next week?
The most obvious hope for Sterling strength in the short-term resides with the UK inflation rate. If UK inflation continues to rise then the Bank of England may be required to change the interest rate to slow down inflation.
Ben Broadbent who is on the voting committee has suggested that unlike in 2008 when inflation rose to 4%, the UK economy is in a strong enough position to deal with an interest rate hike, which means, should inflation rise then a change could happen.
In a recent BBC interview Mr Broad bent said:
“The MPC said given the other assumptions in its forecast it thought probably there would need to be rate rises, and indeed more rate rises than those priced into the interest rate curve in the future than the financial markets expect.” “I do think the time is likely to come when rates will go up generally.”
The last time levels were above 3% was just after the economic crash in 2008, where the Bank of England decided not to act even when inflation moved up to 4%. In the short-term an interest rate hike due to inflation rising might be bad for consumers but very positive for Sterling exchange rates.
Is there too much optimism surrounding the UK inflation rate?
Whilst there is hope for Sterling if inflation should start to rise, there could also be an argument that things will continue to get worse before they improve. The GBP/EUR rate for example has continued to fall due to uncertainty surrounding the Pound, and that does not look likely to disappear. If you believe in trends then there is a lot more chance the exchange rate could drop, especially if UK inflation falls once more like it did in the last release.