Pound Sterling Reaches Three-Week High as GDP Increases

14 October 2021 | Updated: 14 October 2021

Thursday saw the pound sterling extend its gains as the US dollar continues to lose ground against the other currencies. The GBP/USD exchange rate is currently at 1.3710, up 0.41 percent on the day. The pair had previously reached 1.3434, its highest level since September 24th.

The August GDP data came in at 0.4 percent, which was an improvement above the previous month’s reading of -0.1 percent. Following the government’s relaxation of lockdown limits in July, August was the first complete month without Covid-19 limitations. With inflation far above the Bank of England’s objective and the UK economy within 0.8 percent of pre-pandemic levels, there are compelling arguments for the Bank of England to raise interest rates soon.

With BoE Governor Bailey and MPC member Saunders issuing hawkish views earlier this month, the central bank has hinted that it may hike rates sooner than expected.

Markets have reacted by banking on a rate hike before the year’s conclusion. This would be a historic move, as the Bank of England would be the first major central bank to hike rates since the outbreak began (apologies to the RBNZ, which raised rates last week). With only six weeks remaining in 2021, market investors will be closely monitoring every statement made by BoE members in the run-up to the policy meeting on November 4th, looking for clues as to when the BoE expects to increase.

The FOMC minutes in the United States revealed that the Federal Reserve plans to cut its bond purchases in November or December. According to the minutes, the Fed would gradually lower the USD 120 billion per month until the program is completely phased out by July 2022. In the United States, rate fever is gaining traction, with the market pricing in a rate hike from December 2021 to September 2022.

Pound Sterling Stays Buoyant, Following Weakened US Dollar

The pound sterling is giving up gains towards the end of the US trading session on Thursday, with the pair sliding below 1.3700 after reaching a three-week high of 1.3730. Cable, on the other hand, continues strong on daily charts, trading above the top of the previous trading range at 1.3650/70.

The pound has risen in value over the last two weeks as the market anticipates a Bank of England interest rate hike early next year. With inflation approaching nearly twice the Bank’s price stability objective, officials at the Bank of England are publicly discussing the potential of speeding up the monetary policy normalization plan.

On the other side, the US dollar is trading lower on Thursday, owing to a heightened appetite for risk. The market overlooked the drop in US weekly jobless claims, which fell below 300,000 for the first time in 19 months, as confirmation on Wednesday that the Federal Reserve is set to begin rolling back its bond-buying program over the next month, as suggested by the minutes of the last FOMC meeting, released on Wednesday.

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Azeez Mustapha

Azeez Mustapha is a trading professional, currency analyst, signals strategist, and funds manager with over ten years of experience within the financial field. As a blogger and finance author, he helps investors understand complex financial concepts, improve their investing skills, and learn how to manage their money.