Pound May Weaken Amid Rate Hike Expectations

The British pound has been a top performer among G10 currencies this year, but its recent gains may be short-lived due to expectations of rate hikes in the US and eurozone. The pound has risen by around 1.6% against the euro, 2.8% against the Swiss franc, 4.9% against the Swedish krona, and 1% against the Canadian dollar since the start of the year.

According to Matthew Ryan, head of market strategy at Ebury, the pound's resilience has been driven by a strong economy. The UK's gross domestic product grew by 0.4% in the second quarter after increasing by 0.6% in the first quarter. Consumer spending was boosted by sunny weather and interest in the FIFA World Cup.

However, market pricing indicates a low probability of an increase at the September meeting of the Bank of England's key rate, which has remained at 3.75% throughout the year. Rabobank senior currency strategist Jane Foley believes that dovish rhetoric from the Bank of England on September 17 could further weaken the pound ahead of the first annual budget of Prime Minister Andy Burnham's administration, scheduled for October 28.