Pound briefly touches €1.19 vs Euro
The Bank of England's Monetary Policy Committee (MPC) meets this Thursday to announce their interest rate decision. While it's widely predicted that the bank will leave rates on hold at 0.5%, investors have been pricing in a growing risk of a hike as early as this week which has lifted the pound.
Speculation has been growing all year and the last minutes of the meeting revealed BoE policymaker Martin Weale joined Andrew Sentance in voting for a 0.25% rate hike. This has been supported by firmer UK data and the expectation of higher rates helped strengthen the pound to a 3 week high, briefly getting above €1.19
"A rate hike this week would be a surprise and sterling would definitely move higher on it, but the general feeling is that there is a high possibility of a hike in the next few months," said Neil Mellor, currency strategist at Bank of New York Mellon.
So the Pound's going to rise then?
Not necessarily. Despite strong expectations of a rate rise, there are concerns that a such an increase could unsettle an economic recovery. Analysts are worried that tax increases, spending cuts by the government and expected job losses in the public sector in the coming months could hurt economic growth.
If they take the view that the economy needs to settle before rates can go up, then this would weaken Sterling and push exchange rates lower. Indeed most of the gains vs the Euro recently has been on figures making it unlikely the EU would raise rates, when weak German industrial data further dampened these expectations.
So it's rate hike expectations both in the UK and the Eurozone that is causing the swings in GBP/EUR rates at the moment. As speculation gathers on which economy will raise rates first, GBP/EUR rates will likely remain volatile and it's impossible to predict where it will go in the short term.
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UK data today is Retail Sales and House Price information. The last measure of Retails Sales was much worse than expected. We expect an annual 0.3% decline and if it’s lower Sterling may weaken. There are also some Industrial Production figures from Germany today.