What will the latest interest rate decisions in the US, the Eurozone, and the UK mean for the pound?

The upcoming interest rate decisions by the US Federal Reserve, the European Central Bank, and the Bank of England are expected to cause volatility in the markets. Investors are still concerned about banking liquidity fears that surfaced a few weeks ago, and they are waiting for the central banks to address these issues.

The US Federal Reserve is expected to raise interest rates by a quarter of a point, which could cause the US dollar to rise in value. The European Central Bank is also expected to raise rates by either a quarter point or half point, which has already caused the euro to strengthen against the pound and the US dollar in recent months. The Bank of England is also expected to announce a rate hike.

Investors will closely monitor the potential for further rate hikes by all three central banks and to understand their thinking. They may shift their positioning in response to any changes in interest rate forecasts, depending on the commentary by the banks. The potential for further volatility is high.

Sterling remains fragile in 2023, and concerns remain over the economic outlook, with strikes and a cost of living crisis heaping pressure on policy makers. The Bank of England may be nearing the end of its interest rate hike cycle, and investors are becoming wary of the economic outlook.

The Bank Holiday weekends in London may disrupt markets, leading to thinner trading volumes and increased volatility. London accounts for the majority of globally traded FX, and this may cause further market turbulence.

As an Associate Director at one of the UK’s largest FX brokerages, the author offers personal service and outlines strategies based on the latest FX research available to the market. For those with a currency transaction to undertake, whether buying or selling the pound, the author advises contacting them directly for more information on what will be driving levels and what can be expected.

Pound sterling over the last decade

Over the last decade, the value of the pound sterling has seen some significant fluctuations due to various economic and political events.

In 2011, the pound was trading around 1.55 against the US dollar. However, in 2013, the pound started to strengthen and reached a high of 1.72 against the US dollar in mid-2014. This was largely due to a strong economic recovery in the UK after the global financial crisis of 2008.

However, in 2016, the value of the pound took a sharp downturn following the UK’s decision to leave the European Union (Brexit). The pound dropped to its lowest level in 31 years, trading around 1.22 against the US dollar in October 2016.

In 2018, the pound’s value remained weak due to ongoing Brexit uncertainty and political instability. However, it saw a brief uptick in early 2019 when the UK government reached a Brexit deal with the EU.

The COVID-19 pandemic also had a significant impact on the pound’s value in 2020. It dropped to its lowest level against the US dollar in over three decades, trading around 1.15 in March 2020, as investors sought safer assets amid the uncertainty and economic turmoil caused by the pandemic.

Since then, the pound has seen some recovery, although it remains relatively weak compared to pre-Brexit levels. As of May 2023, the pound is trading around 1.38 against the US dollar.