Pound may have jumped ahead

27 March, 2018

The British pound has continued on its winning ways in today’s trading session, breaking through the $1.42 level against its US counterpart after last week’s economic data justified the case for a rate hike in May.

Although rates were kept on hold by the Bank of England last week, 2 out of its 7 of its board members voted to increase rates which was against market expectations.

This may have been attributed to the wage figures that were also released last week which beat consensus and removes a significant barrier for the BOE to tighten monetary policy.

The transition agreement agreed to by the UK and the EU last week has also lent support to the pound but some say the market may be getting ahead of itself and that the sterling’s rise in recent weeks may be about to end.

There may be a little too much optimism over the transition deal brokered as the chances of something going wrong remain high while analysts at Barclays believe that the rate hike expected in May is already priced into the market which gives little reason to believe the pound will make further gains.

"Our expectations for near-term GBP appreciation materialized last week after the UK and the EU reached an agreement for a 21-month transition period, while higher wage growth solidified market expectations for a May BoE rate hike," says Hamish Pepper, a foreign exchange analyst with Barclays.

Accordingly, Barclays have revised their BoE call and now expect a 25bp rate hike in May 2018 and February 2019, broadly in line with market pricing.

"While we continue to envision some GBP appreciation over the forecast horizon, we see little impetus for further near-term Sterling gains and are neutral at current levels," says Pepper.


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