Sterling On The Move

Expectations are mounting from some quarters that the Bank of England (BoE) may be the next major developed world central bank in line to raise policy rates. Various futures and swap markets are pricing in tightening over the coming years, and some ex-BoE monetary policy members suggest that rates could be hiked as early as the end of 2014.

Although near-term rate hikes are possible, we think the market is jumping the gun, as the UK economic recovery remains too fragile to withstand higher interest rates. We forecast that the next UK rate hike will come only in 2016, and probably with a smaller magnitude of total tightening when it does come.

Despite the potential recalibration of interest rate expectations, though, sterling looks good technically for further gains. We are still bullish on the pound against the Canadian dollar (a view which is up 9.5% since initiation in our asset class strategy) and still prefer the unit against the euro and some of the weaker emerging market currencies. The US$/GBP exchange rate is still a story of two competing strong currencies, and so despite expecting sterling outperformance over the medium term, this will be a slow grind. For now, the retest of support at US$1.62/GBP and subsequent rebound suggests that the uptrend for sterling remains in place.

This Week's Trivia Question

Last week's trivia question was about sharp increases in interest rates, in light of the fact that several emerging market central banks have hiked rates recently. We asked, which central bank raised its policy rate by 1,200 basis points in one swoop in early 2009, and days later, by a further 1,500 basis points (to 55.00%) to defend the collapsing currency? The answer is the central bank of the Democratic Republic of the Congo.

This week's question is as follows: which North American actor recently stated in an interview that he had not watched any episodes of the long-running US TV drama series in which he plays the lead character? (Hint: the programme has become increasingly over the top, and the latest series is filmed in London.)

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