The pound reached a new 26-year high against the dollar last night. Still short of the important 2.0200 level, the gain was still impressive and primarily fueled by speculation on interest rates. Among the major forex countries, there are a number of central banks having their meetings this week, but the Bank of England is the only one likely to raise interest rates this time. With regard to GBP/USD, currency traders are being driven by the search for the highest yield. With the Fed not likely to change rates any time soon, the differential is pushing the cable to new highs.
The strength of the pound in the forex market should not surprise most market observers; Terri Belkas of DailyFX.com predicted the new high in the cable last week. The money supply is Great Britain is growing at an astronomical rate. House prices continue to surge, and labor conditions are extremely tight. The recent CPI report is at 2.5%, above the 2.0% level preferred by the BoE. The latter might be the most important factor leading to Thursday’s rate hike, as Monetary Policy Committee member Kate Barker has said that the bank’s credibility is dependent on keeping inflation in check.
The pound was down yesterday against the Japanese yen, the Swiss franc and the euro, but its long-term strength seems secure. Construction PMI printed this morning at 60.1, compared to the expected results of 57.7. The economy seems like it can withstand future rate hikes with the threat of collapse. With oil still above $70/bbl, worldwide inflation is not going to go away. The BoE is the only bank likely raise interest rates this week. And the futures market has even priced in another rate hike later in the year, which would bring the interest rate in Great Britain to 6.00%. It is no wonder, then, that even with new terror threats in London and Glasgow, market observers are predicting even greater highs in the forex market for the pound against the dollar.