The pound could rise against the euro due to the Bank of England’s optimistic stance as interest rates are now expected to rise earlier than previously anticipated. The pound was also pushed higher as traders looking for a good offer bought a cheaper pound. According to analysts, the pound could reach new highs by the end of this year.

Bank of England and Rate hike

While last week, the pound fell due to inflationary concerns, over the weekend it was higher. With limited economic data the week ahead, the pound will be likely influenced by more news on the fuel crisis, but analysts expect it to remain supported on BoE’s interest rate prospects. The Office for National Statistics has also upgraded its second quarter GDP growth forecast from 4.8% to 5.4%. With the Monetary Policy Committee of the BoE expected to raise the bank rate to 0.25% in May and one more time in 12 months, markets are optimistic.

In a speech that was given to the Society of Professional Economists annual dinner, the Governor of the Bank of England said: “All of us believe that there will need to be some modest tightening of policy to be consistent with meeting the inflation target sustainably over the medium term. Recent evidence appears to have strengthened that case, but there remain substantial uncertainties and we are monitoring the situation closely. The BoE policymakers would need to see clear evidence that the labour market is thriving and employment activity is back to normal levels before taking any action.

Labour market possible scenarios

The BoE governor in his speech, outlined three potential scenarios for the labour market, highlighting the uncertainties ahead, as each of these could influence growth, inflation and monetary policy in different ways. The first scenario revolves around the furlough scheme and how after the furloughed workers return to their old jobs, we are still left with an excess of job vacancies. If these vacancies are linked with shortages of workers in particular sectors, this could push wages higher. This situation could raise the rate of unemployment consistent with stable wage growth. In a second scenario, where demand rises over time, vacancies and unemployment could fall. In the third possible explanation, advertised vacancies could be higher, but some of these could turn out not to be jobs as employers change their mind or postpone hiring.

Tightening monetary policy and bank rate

Governor Bailey has characteristically said that despite uncertainty, the stimulus program will need to unwind, and this will be coupled with an increase in the bank rate. He said: “For most members of the MPC, the outlook for the labour market – as I described earlier – is highly uncertain and to some degree likely to be resolved in fairly short order, and this justified a wait and see approach on policy in view of the continuing belief that higher inflation will be temporary. Within this view, some members put more emphasis on the continuing shortfall in the level of GDP relative to pre-Covid, while others emphasised the continuing direction of travel towards closing that gap and the evidence of cost pressures accompanying the closing. But all of this group were of the view that the stimulus to monetary policy enacted in response to Covid would need to start to unwind at some point, that unwind should be enacted by an increase in Bank Rate, and if appropriate would not need to wait for the end of the current asset purchase programme.”

This means that the Bank is expected to normalise its policy in early 2022 which could support the pound. Analysts view the pound’s recent weakness as temporary and expect it to strengthen in the long-term.

If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.