Sterling exchange rates remain high – will the pound weaken?

Sterling exchange rates continue to sit at elevated levels following a strong performance from the pound in 2023.

During yesterdays session GBPEUR once again rose within touching distance of the yearly-high, which was breached a week today.

A number of analysts and commentators are suggesting potential downside risk for GBPEUR in the coming weeks.

On Tuesday UK employment data confirmed the unemployment rate had risen to 3.9% which was above last months reading and expectations of 3.8%.

The unemployment rise will be monitored closely by the Bank of England. Although the deviation from the expectation is small, the data suggests that the UK economy is beginning to cool down.

A flurry of weaker UK economic data would increase risk sentiment and pile pressure on the pound against its counterparts.

The BoE began raising interest rates last year to try and bring rampant inflation under control. Interest rate rises discourage spending by increasing the cost of borrowing. This in turn decreases the amount of money being spent in the economy which reduces prices.

UK inflation must be brought under control, however, the BoE will not want to cause a recession by raising rates too high. The current base rate sits at 4.5% which is the highest it has been since the 2008 financial crisis.

Interest rate hikes have supported the value of the pound against over the last year. Dankse Bank are suggesting the BoE will raise rates one more time in June before pausing.

Sterling could weaken if the BoE suggest a pause or end to the current rate hike cycle.

The dollar weakened across the board following the last Fed meeting where the central bank suggested US rates had reached their terminal level.

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