Pound drops despite interest rate hike

Pound Drops: We have seen the Pound drop across the board this afternoon, despite the expected interest rate hike by the Bank of England. All 9 members voted for rates to go up to 0.75%. As we predicted in our last post, this caused a slight gain for the Pound. The gains were limited however. We pointed out a few days ago that a rate hike would likely push Sterling a little higher, but that when Mark Carney gave his speech it was likely to drop back away again. That’s exactly what happened today as the chart below illustrates:

GBPEURDaily

Why did the Pound drop?

Today’s rate hike was widely expected by the markets. When it happened, the Pound rose a little, and this was because all 9 members voted for the hike, which was unexpected. It was Mark Carney’s comments in his press conference that caused the Pound to fall again, as we forecast earlier this week. He stated that there would only be gradual increases in interest rates, which he expected to be at 1%-1.25% by 2020. This means there is no chance of another rate hike any time soon.

Investors sold Sterling on the back of these comments, causing it to lose all it’s gains and actually end up lower against the Euro and US Dollar than where it started the day.

Will the Pound go up or down in 2018?

With this expected rate hike now done and dusted, many clients will want to know if the Pound will go up or down for the remainder of the year. Our view is that all focus will now shift back to Brexit related uncertainty, and at the moment the outlook for Sterling is negative. Very little progress has been made with Brexit negotiations. If the UK ends up leaving the EU with no deal, then we think it’s likely that GBP/USD could drop as low as $1.15 and GBPEUR could drop to parity.

There is still time for the UK and EU to make a deal however. If they can do so in the next 6 to 9 months then there is scope for Pound/Euro rates to recover  to €1.20. At present however, a no deal scenario is looking more likely. If the EU can make some concessions before the end of the year, a deal could still be struck. If not, we can’t see anything that will stop the Pound plunging against the Euro, USD and other currencies.

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