In the past six months, sterling has gained 5% and 8% against the euro and dollar, respectively.
A rising interest-rate differential has been crucial. Forward markets now price sterling three-month interest rates in one year?s time at 4.8%, up 130 basis points since the Bank of England?s Monetary Policy Committee (MPC) last cut rates in July 2003. Eurozone forward rates have fallen 30bp in that time to 2.2%. So the yield spread is now 260bp.
It is likely to widen.
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