Since June of last year, the British pound has been a rather risky and unattractive currency. However, in September this year, the situation started to change radically, and now, the pound is testing levels not seen since the Brexit referendum (on the 23rd of June, 2016). We believe that the pound could continue to grow for the rest of the year for the following 7 reasons:
1. The Bank of England has promised a rate hike in the coming months. Despite the fact that at their most recent meeting on the 14th of September, the BoE decided to maintain the key rate at a record low of 0.25%, Governor Mark Carney has promised that an interest rate hike is coming in the next few months. This caught markets off guard; since most experts hadn’t been expecting a tightening of monetary policy from the UK until at least 2019, and the pound subsequently surged against the dollar. An earlier rate hike could have a positive influence on the British economy given that having come out of the deflation crisis; the country is potentially at risk of spiralling inflation. The last time interest rates in the UK were raised was in 2007. A rate hike could push the pound up against both the US dollar and euro.
2. News of the terrorist attack will soon be factored in by the market. The act of terrorism that took place on the London Underground at Parson’s Green may have a negative short-term influence on the currency market. In the long term, however, as experience shows us, such tragic events are having less and less of an influence on currency markets.
3. Brexit is factored in by the market. Judging by the dynamics on the British pound in September, markets have started giving less significance to developments in the ongoing talks on Britain’s exit from the EU. The EU and UK both seem to have accepted the reality of Brexit and so any negative news surrounding it is unlikely to have much of an influence on markets.
4. Inflation brings optimism. Inflation figures for August beat expectations (2.9% against a forecast of 2.8%). This matches the value for May, which is the highest seen in 2017. Growing inflation could persuade the Monetary Policy Committee to raise interest rates, having already outlined a timeline for doing so. As it stands, the MPC is considering raising interest rates somewhere between November 2017 and February 2018. These expectations are fuelling growth on the pound against the dollar and euro.
5. Economic growth in the third quarter could beat expectations. British GDP grew by 1.7% in the second quarter of this year, which was in line with expectations (the growth rate in the first quarter was the same). The Bank of England has forecasted a higher growth rate for the third quarter than for the second. This could become a positive factor for the pound.
6. The US Fed is unlikely to raise rates in the near future. At the Fed meeting from the 19th to 20th of September, a rate hike looks unlikely by all accounts. However, if the Fed raises rates in December, it will be expected, and therefore won’t be able to push the dollar up by much, whereas expectations of a rate increase in the UK will continue to be relevant. Accordingly, the dollar’s growth will be put on hold, while the pound has every chance of continuing its growth.
7. The pound’s growth could continue. We believe that in the near future, the pound could trade within a range of 1.35 to 1.36 USD to the pound, and by the end of the year, the pound could rise to around 1.4 – 1.44.