Sterling strengthens ahead of Bank of England interest rate decision

Sterling stronger ahead of Bank of England decision

2023 is turning into a positive year for the pound after a disappointing end to 2022. Sterling is the strongest performing major currency of the year and exchange rates remain elevated against many of its major counterparts.

Cable (GBPUSD) is trading close to one-year highs while GBPEUR hit a 2023 yearly high during yesterday’s session. The pound is also trading close to yearly highs against the Loonie (CAD), Kiwi, and Aussie.

What is driving sterling higher?

The pound has been boosted by a stream of less than negative economic data. The UK is no longer facing a lengthy recession as previously suggested by the IMF, BoE and OBR. Revised forecasts for the year suggest the UK’s economy will shrink 0.2% by year-end but importantly avoid a technical recession. PMI data from the services sector last month was positive signaling an expansion in activity.

Another key driver for exchange rates is the Bank of England’s interest rate policy. Particularly when compared against the policy of other central banks. The BoE have been raising interest rates for over a year in attempt to bring UK inflation under control.

Inflation remains elevated in the UK and significantly higher than in the Eurozone and US. The bank is expected to raise interest rates today by 25 basis points, raising the base rate to 4.5%. This could lend support to the value of the pound, however, markets will be looking for signals of future interest rate rises as today’s decision may already by ‘priced in’ to exchange rates.

Last week, the Fed raised rates but their commentary led to dollar sell-off. Suggestions that US rates have reached their terminal level is negative for the dollars outlook. A similar suggestion from the BoE today could weaken the pounds footing.

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