Pound reaches strongest level since 2016 as BoE rate hike looms
The pound hit its highest effective exchange rate since the Brexit referendum, buoyed by a weaker dollar and expectations of a Bank of England rate increase.
The British pound rose to its strongest level against a basket of currencies since June 23, 2016, according to data from the Bank of England. The move follows a decline in the US dollar after the recent US midterm elections and reflects the pound’s gains against the euro and yen.
Investors are also pricing in a likely interest-rate rise by the Bank of England at its noon decision, making sterling more attractive for fund holders. The bank’s effective exchange rate index (EERI) climbed to 86.5372, its highest reading in a decade.
"When it came to the market reaction, there was relief among investors that the results weren’t disputed, which helped to reduce political uncertainty," said Jim Reid of Deutsche Bank.
Analysts note that the pound’s performance will depend on the BoE’s vote outcome, inflation outlook and any guidance on future tightening. Charalampos Pissouros, senior market analyst at TradingPoint, said traders are watching for a unanimous vote and any upward revision to inflation forecasts, which could further support sterling.
The Bank of England is expected to raise the Bank Rate by a quarter point to 4%, its first increase since August 2023, as inflation remains above target. Peder Beck-Friis of PIMCO said the hike is already fully priced by markets, while Andrew Wishard of Berenberg predicted an 8-1 vote in favour.
The pound’s rally coincided with a broader risk-on rally that saw the dollar weaken and oil prices fall, as market participants reassessed geopolitical risks following the US election results. European stock markets also rose, with the FTSE 100 reaching a three-month high.