Sterling Rising Quickly – Sterling Update

Here’s the latest currency news from our partner Moneycorp, to help you find out what your money is worth.

GBP

GBP made strong gains against the US dollar last week but receded at the beginning of this week. For GBP/EUR and GBP/USD, last week was one of the most impressive weeks for sterling this year, with GBP/EUR climbing 1.5 cents and GBP/USD up 1.2 cents.

This took GBP/EUR to within 1 cent of its best rate this year, which topped 1.1780 during the summer. GBP/USD still has a way to climb as this breached 1.30 over the same period and is well below the medium-term historical average of around 1.40 in previous years.

Against the euro, sterling has been flat this week. It has not broken past 1.1690, with the resistance level at 1.17, and has not gone lower than 1.1640 – giving the pair a range of only a half-cent. This is compared to the fluctuation of 1.5 cents we saw from GBP/EUR last week.

Although there was not much to note this week, UK data has been broadly positive recently, with GDP and labour market data beating expectations. However, UK inflation is looking stickier, with many surveys suggesting price rises will not slow as much as expected.

The market doesn’t anticipate any further interest rate rises in the UK but that they will stay “higher for longer”. We’ll likely have more insight into this narrative after the Bank of England’s meeting next Wednesday 13th December.

With sterling rising so quickly over the last month, many analysts have suggested the pound is now in ‘overbought’ territory. This could mean a swift rebound or correction is more likely if any upcoming data releases are perceived to go the ‘wrong’ way.

We’re looking at UK CPI inflation as one of the riskiest events this month for both sides of the market and will be released on 20th December. Higher-than-expected UK inflation could support the higher-for-longer UK interest rate narrative, which could positively impact the pound.

EUR

German and total EU inflation dropped further than expected last week. German CPI fell more than the expected 3.5%, landing at 3.2%, from 3.8% last month. CPI inflation in the whole European Union followed a similar path, dropping to 2.4% from 2.9% from October to November. While this could be positive for the European economy and may help it grow, the reduced inflation could cause currency weakness as it approaches the central bank’s 2% target.

The euro performed well last week, with EUR/USD reaching over 1.10 at its peak for the first time since August. Levels have since fallen to more rangebound territory of around 1.07 – 1.08 this week – however, this could suggest there is more to come from the single currency. Thursday saw the latest data released for the EU’s GDP, which decreased by 0.1% for the quarter, in line with Eurostat’s initial estimate. Year-on-year growth was flat at 0.0%, slightly less than the marginal growth anticipated by the markets, forecast at 0.1%.

We will be keen to see the commentary from the European Central Bank meeting on Wednesday next week, as the market is now pricing in 4 interest rate cuts (i.e., 1%) in 2024.