Earlier today the Bank of England chose to raise interest rates by 0.25%, taking the UK interest level to 0.5%. Despite this positive movement Sterling lost ground against all major currencies immediately following the announcement. There was an expectation that the Bank of England would raise interest rates and this was thought to cause Sterling strength but that’s not the case.
The reason for the loss came from the rhetoric that followed the announcement, as the central bank suggested there may only be 2 more hikes before 2020. This was received as a particularly negative outlook as the Bank are going to act further with the tightening of economic policy. The currency markets do have a tendency to go against the tide when there is major decisions that are expected and this was no different.
Where to next for the GBP/EUR exchange rate
Sterling has now given up 2.5 cents against the Euro from the start of the week with the GBP/EUR rate sat in the 1.11’s at the close of play. All eyes will now return back to the Brexit talks and the situation in Catalonia. There is going to be a General Election in Spain before the end of the year, which is likely to create even more uncertainty. Furthermore, Brexit talks look like they have taken a positive turn so it will be interesting to see if there is some agreement on trade talks which should help Sterling’s position a little.
Over the next few weeks the GBP/EUR rate may well just remain in the range bound level of 1.11 and 1.14. Until there is another change of events and the status quo becomes something different there is unlikely to be a huge swing either way. Despite the losses that Sterling has made today I think there is more chance the rate moves back to 1.15 this year than drops to 1.10.