Sterling has strengthened against the euro as markets anticipate possible Bank of England rate increases and French debt concerns weigh on the common currency, according to ING.
ING’s Oct. 22 foreign exchange note said EUR/GBP, the number of pounds needed to buy one euro, fell below 0.840. It linked pressure on the euro to French risk and described the pound as an outperformer among Group of 10 currencies. ING linked sterling’s strength to a more hawkish Bank of England outlook.
In an Oct. 12 forecast, ING had projected a possible rate increase at the Nov. 5 meeting and another in February; if both occurred, Bank Rate would reach 4.25% from 3.75%. Those were forecasts, not announced policy changes.
The Bank of England held its benchmark rate at 3.75% in September in a 6-3 vote. Three policymakers favored a rise to 4%. The Office for National Statistics said consumer prices rose 3.5% in the 12 months to September, from 3.1% in the 12 months to August.
Reuters reported that markets were pricing at least three 25-basis-point Bank of England increases by April, compared with roughly two European Central Bank hikes. Chris Turner, an ING strategist, called sterling “a high-carry European currency,” Reuters reported. The outlet described how investors can use lower-cost euro borrowing to finance pound exposure and seek to capture the yield difference.
ING’s Oct. 12 note compared French debt concerns with Italy’s 2018 debt crisis and distinguished the situation from Greece’s 2012 selective default. The Bank of England said borrowing costs for households and businesses had risen since the energy shock began, and that elevated energy prices could add to inflation. The government’s inflation target is 2%.
The European Central Bank’s reference rate put one euro at £0.83825 on Oct. 21. That daily benchmark is separate from intraday market trading. The U.K. Budget is scheduled for Wednesday, Oct. 28, followed by the Bank of England’s next decision on Nov. 5 and the next U.K. inflation release on Nov. 18.
