By Fatma Younis
The British pound has reached its highest value against a basket of major currencies since the 2016 Brexit referendum, driven by expectations that the Bank of England will raise interest rates on Thursday.
Sterling index hits ten-year high
The Sterling effective exchange rate index, which measures the pound against 18 major currencies, rose to 86.4, its highest reading since the first quarter of 2016. The index, with a 2005 base of 100, has not exceeded 100 since 2007 and fell as low as 78.08 in late 2022. Compared with a year ago, the pound is up 5.7 percent against the euro and 3.5 percent against the US dollar.
Rate decision and market scrutiny
The Bank of England’s Monetary Policy Committee is widely expected to increase the base rate, but analysts say the focus will be on the vote split, updated forecasts and Governor Andrew Bailey’s guidance. George Vessey, macro strategist at Convera, warned that any pushback against consecutive future hikes could weigh on sterling. Markets currently price in about 100 basis points of further tightening through late 2027, a path Vessey views as ambitious.
Gilt yields reflect expectations
The two-year gilt yield, a proxy for short-term rate expectations, stood just below 4.73 percent on Thursday. A single rate hike typically moves the base rate by 25 basis points, so 100 basis points would imply four hikes. However, most analysts do not expect four actual rate increases, as bond markets can shift quickly with economic data and global developments.
