Analysts are positive that the pound will likely continue to strengthen in the coming days and even weeks, after encouraging news that the economy should show strong growth in the third quarter and the Bank of England is considering raising interest rates in early 2022.

Growth is expected to continue

Friday’s disappointing GDP data which showed that the economy grew very little did not affect market sentiment, as economists argued that many of the reasons behind the slowdown were associated with the past including self-isolation rules. August and September GDP numbers are expected to be stronger, confirming expectations that the economy is healthy. Economic thinktank NIESR has forecast that UK growth will have picked up in August and September, due to the domestic tourism and hospitality industries, with September’s growth to rise to 0.8%.  

The pound was higher against both the euro and the US dollar on Monday morning, as markets are confident that the BoE could move faster than both the ECB and Federal Reserve and raise interest rates early next year. This will also depend on positive economic data coming out of the UK and investors will want to see consistently positive news before they become confident about the strength of the UK currency.

On Friday, the pound reached a two-week high, following its previous lows, but fell again after global sentiment was threatened by rekindled fears regarding the troubled relationship between the US and China.

Bank of England and rates

The Bank of England is expected to raise interest rates in the first half of 2022 due to improved economic conditions including growth rates and rising inflation. Economists are concerned that inflation will rise above the Bank’s target and for a longer period of time, which could lead to further interest rate rises. This will help boost the pound too.

The Bank of England appears to be more positive and ready to push interest rates higher than many other central banks such as the Swiss National Bank, the ECB and the Bank of Japan.  Following last week’s Monetary Policy Committee members’ appearance before a Parliamentary sub-committee and the revelation that half of the members are already convinced that the minimum conditions for an interest rate hike have been met, the pound has strengthened.

If the recent uncertainty caused by the rapid spread of the Delta variant of the coronavirus proves to be temporary, then the pound will find further support. Economists are still cautious about the pound considering the return to school and the possibility of more cases. The winter is also a concern, and with the number of high cases continuing, consumer spending could be affected. With or without any new restrictions, activity could still suffer as consumers become more cautious. Bloomberg has also highlighted the ending of several government support programmes this month that could weigh on sentiment.

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