The British pound has been steadily rising against the euro for months. The coin is worth almost 10 percent more than a year and a half ago. The main reason for that increase is the growing interest rate differential between the United Kingdom and the eurozone. This makes it increasingly attractive for parties to hold assets in pounds.
While policy rates in the eurozone have remained unchanged at an extremely low level since 2019, the British central bank has already started raising rates at the end of last year.
Last Thursday, the Bank of England raised the official interest rate for the third time in a few months. Remarkably, the pound took a small step back in foreign exchange markets that day. The interest rate has apparently been worked out.
An important reason for this is that the European Central Bank (ECB) made an advance a week earlier on a faster rate increase than currency markets had expected. Yet the pound’s decline looks more like a breather than a trend reversal. It is not certain whether the ECB is actually prepared to step on the interest rate brake considerably and thus also endanger the economic recovery.
In addition, the UK is significantly less dependent on oil and natural gas from Russia than the eurozone. But it is mainly trade talks that can form a new tailwind for the pound.
At the end of February, a free trade agreement with New Zealand was signed. The abolition of import tariffs and rules could increase trade between countries by 60 percent, the British government predicts.
A similar agreement has already been reached with Australia. Negotiations on a trade deal with the United States will begin next week in Baltimore. A second round of negotiations is already planned for the spring.
A good trade relationship with the United States was one of the spearheads of the proponents of a British exit from the EU. The flow of goods and services between the two countries is worth almost 240 billion euros per year. A trade deal with the United States would be welcome.
British pound could strengthen against euro
The growth of the British economy is being slowed down by all kinds of supply chain deficits. Many foreign workers have returned to their homeland. The shortage in the trucking sector and in meat processing plants leads to supply problems and to the culling of livestock that was actually intended for slaughter.
The shortage is also causing prices of all kinds of goods and services to skyrocket in the UK. In the course of the spring, inflation can rise to more than 8 percent.
If the British central bank continues to work harder than the ECB to contain inflation and if trade talks with the US are going well, things will look good for the pound.