British Pound Holds on to Gains Amid Increased Speculation of Rising UK Interest Rates
The British pound was the third strongest of the majors on Tuesday, just behind the Australian dollar and New Zealand dollar, but the price action reflected a consolidation of Monday’s surge as the currency just barely ended higher versus the Japanese yen, US dollar, euro, and Swiss franc. UK construction PMI beat forecasts by rising to 47.0 in July from 44.5, but since the index remains below 50, it continues to indicate a contraction in activity, albeit at a slower pace. As we mentioned last week, the Bank of England’s Bank Rate is set at an ultra-low 0.50 percent, so yield has obviously not been a driver of the British pound strength.
Instead, the currency has been making headway during times of broad-based risk appetite thanks to climbing interest rate expectations. Indeed, according to Credit Suisse overnight index swaps (OIS), the market is pricing in 120 basis points worth of rate increases by the BOE over the next 12 months, which is among the highest of all the major central banks. Likewise, the Reserve Bank of Australia and the Reserve Bank of New Zealand are projected to hike by 152 basis points and 80 basis points, respectively, during the next 12 months, highlighting why the British pound joined the Australian dollar and New Zealand dollar as being the dominant major currencies today.
Related Article: British Pound Weekly Trading Forecast
Read the entire day's economic developments at Daily Fundamentals.
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