The pound rose on Tuesday against both the euro and the US dollar, as stock markets increased, and expectations for an early November rate hike by the Bank of England remained strong. This is the highest level since the pandemic started in March 2020. If the Bank of England proceeds to an early rate hike, then markets will not be disappointed and the pound will rise further, as many analysts suggested. However, if it strikes a more cautious tone and reduces expectations for further rate hikes in 2022, then the pound could fall.

A hawkish statement by the Bank of England suggesting a faster cycle of hikes than is currently expected might boost the pound further, but this is not anticipated.

Interest rates

If the Bank of England raises interest rates as soon as the 4th of November, then the UK central bank will be the first major central bank to raise rates ahead even of the European Central Bank (ECB). The pound rose against the dollar, but the gains were not substantial as the US Federal Reserve is on target to raise interest rates in 2022 with the November policy meeting likely to confirm this.

The lower number of Covid-19 cases has helped boost market sentiment and has given the Bank of England further evidence that the economy has the potential to grow as we come to the end of the year.

Current and potential obstacles

However, Britain's weak economic data, such as Friday's unexpected drop in retail sales has capped further gains. UK growth momentum is also weakening. There are also concerns about potential tax hikes that could be announced on Wednesday's budget statement, alongside tensions between the EU and the UK post-Brexit provisions relating to the trade between Britain, Northern Ireland, and the European Union member Ireland.

A possible headwind for the pound is the failure of the negotiations between the two sides over the Northern Ireland protocol, as Britain has threatened to take unilateral action if talks fail. #

Rishi Sunak’s budget announcement on Wednesday

Traders are now awaiting finance minister Rishi Sunak's budget statement on Wednesday. Markets might be already aware of his plans for higher corporation tax and national insurance contributions, but the devil is in the details. He is expected to end the public sector pay freeze for millions of workers and there has been speculation that the minimum wage for those aged 25-plus could increase from £8.91 an hour to £10 before the next election. For the NHS, there have also been announcements for a £5.9bn for NHS backlogs, diagnostic services and elective surgeries funding, while a £2.1bn is going to improve IT across the NHS. Another commitment has been for £5bn on health research and development over three years. A total of £850m has been promised to inject new life into the arts as a “post-pandemic funding boost.” £700m has been promised to be spent on the new post-Brexit borders and immigration system, and a new maritime patrol fleet. Among his other pledges, is a six-month extension to the COVID recovery loan scheme to June 2022.

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