The British pound climbed to its highest level against a basket of major currencies since the June 2016 Brexit referendum this week, even as traders braced for the Bank of England to raise interest rates for the first time in more than three years, BBC reported. The sterling index reached 86.4 — a level where 100 equals the currency’s value in 2005 — marking its joint highest reading since the referendum, according to Bank of England figures cited by the broadcaster. On Wednesday, sterling was up 0.28% against the dollar at $1.3434 and flat against the euro at €1.1996.
The rally occurs before the Bank of England’s decision on Thursday, when its nine-member Monetary Policy Committee is expected to raise interest rates by a quarter-point to 4%, its first increase since August 2023, according to Yahoo Finance, which cited Reuters. While the European Central Bank and the Federal Reserve had already tightened policy this year in response to energy-driven inflation, the BoE had held back — a stance ING economists described as an “active hold” that amounted to de facto tightening.
Why Sterling Has Rallied
The BBC cited traders saying Britain was being seen “in a different light” given relative political stability, solid growth and a rapprochement with the European Union. Jim O’Neill, an economist and former Treasury minister, told the broadcaster: “I’m not surprised. People were, and to a lesser extent, are, underestimating the improving momentum in the UK.”
UK growth this year has outperformed all forecasts, the BBC reported, though higher energy and fuel prices have begun to hit consumer confidence. A stronger pound can help rein in inflation and boost buying power for imports and holidays.
Energy Prices Force the Bank’s Hand
The case for Thursday’s hike has been sharpened by surging oil prices. Brent crude futures hit multi-month highs last week and, despite a roughly 4.5% slide on Monday on hopes of a diplomatic resolution in the Middle East, remained at $108.37 a barrel — far above pre-conflict levels, Yahoo Finance reported. ING economists said inflation is expected to rise above 4% early next year from the current 3.5%, and that the worsening energy crisis made it “much harder for the Bank not to act.”
ING expects a 7-2 vote split at Thursday’s meeting and noted that markets have already priced in more than 100 basis points of tightening. Money markets, according to LSEG data cited by Yahoo Finance, were fully pricing in four quarter-point rate hikes by next September — a path ING called “extreme.”
Futures and Resistance Levels Drive Sterling Gains
Chart watchers see room for more gains. Barchart reported that March pound futures hit a six-week high with bullish momentum indicators, and identified a move above 1.3450 as a buying opportunity with an upside target of 1.3700. TradingView.com noted that GBP/USD was testing the 1.35 handle after breaking resistance between 1.3435 and 1.3475, where the 200-day moving average and key Fibonacci levels converged, and that large speculative short positions in sterling left room for further short covering.
What Comes After Thursday
Last week’s budget from finance minister John Healey drew little reaction from markets, with neither gilts nor the pound moving strongly, Yahoo Finance reported. Attention now turns to whether the BoE signals more hikes ahead; ING said a follow-up increase in February is likely, even as it warned that market pricing for rate rises looks stretched.
FAQ
When is the Bank of England’s rate decision?
The Monetary Policy Committee meets Thursday, with a 25-basis-point rise to 4% widely expected — the first increase since August 2023.
How high has the pound risen?
The Bank of England’s sterling index reached 86.4 this week, its joint highest since the June 2016 Brexit referendum, and the pound traded at $1.3434 against the dollar on Wednesday.
Why is the Bank raising rates now?
Brent crude at $108.37 a barrel has pushed expected UK inflation above 4% early next year from 3.5% currently, forcing the BoE to abandon its wait-and-see approach.
How much tightening are markets pricing in?
Money markets were fully pricing four quarter-point hikes by next September, according to LSEG data — more than ING economists consider justified.
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