Sterling has been the strongest of the G10 currencies over the last 6 months but it will show its less attractive side when rate hikes really bite, Kit Juckes, Chief Global FX Strategist at Société Générale, reports.
Pricing of a further 5 25 bps rate increases in the UK this year is lifting Sterling
At a time when the single biggest driver of foreign exchange rates has been shifts in expectations about short-term interest rates, the pricing of a further 5 25 bps rate increases in the UK this year (to a peak just below 6%), is dragging GBP/USD towards 1.30 and EUR/GBP down towards 0.85.
If UK rates rise as far as is currently priced into the UK curve (which seems both unlikely and dangerous), the Pound will remain strong for just as long as those rates can outweigh the longer-term economic outlook.
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