Could pound sterling now strengthen against the US dollar?

The Bank of England is forecasting a base interest rate rise in the ‘coming months.' But the US Federal Reserve is insisting that rising inflation is 'transitory.' Could a policy divergence see sterling soar?

GBP/USD is one of the most popular Forex currency pairs. And right now, 73% of IG clients are long on the market, with £1 currently buying $1.34.

This optimism for sterling is due to the perceived likelihood that the UK’s Bank of England will raise its base interest rate before the US’s Federal Reserve. As a currency’s base rate is arguably the most important factor in determining its strength, the client consensus isn’t particularly surprising. Moreover, many of these clients will be position traders, prepared to wait until the UK raises its base rate. But the Federal Reserve might act first.

Do you think sterling will strengthen against the US dollar?

Trade 100+ FX pairs with Singapore's No. 1 forex provider. * Enjoy fast execution and low spreads. We'll never fill your order at a worse price. Create an account with IG to start trading forex today.

1 Awarded the best forex provider in Singapore by the Global Brands Magazine in 2021.

Where next for sterling?

The strength of sterling is directly tied to potential interest rate rises in the face of racing inflation. On 4 November, the Bank of England held off from raising the base rate from its historic low of 0.1%, which saw sterling fall 1% against the dollar. Governor Andrew Bailey was labelled a 'bad boyfriend' for indicating to traders that a rise should be expected.

While the Monetary Policy Committee (MPC) voted 7-2 in favour of no change, Bailey described it as a ‘close call,’ with the MPC saying there was ‘value’ in waiting to see how the jobs market coped with the end of the furlough scheme. And it signalled it will be raising rates in the ‘coming months.’

But with the Resolution Foundation reporting that only 136,000 out of the 1.1 million people still on furlough had moved into unemployment or inactivity, the chance of a rate rise has probably now fallen.

And Bailey said the decision was ‘a reflection of the position we’re in.’ His view is that inflation is being caused by the global supply chain crisis, and therefore increasing interest rates domestically will make little difference to consumer prices. But he accepts there will be ‘some need to increase interest rates to bring inflation sustainably back to target.’ And the ONS has predicted that inflation will rise to 5% by April 2022, more than double the Bank’s 2% target.

However, raising rates too soon risks strangling the green shoots of economic recovery, as it would increase the cost of servicing debt, including mortgages and credit cards.

And National Insurance is increasing by 1.25 percentage points in 2022. Corporation tax is rising from 19% to 25% in 2023. Income tax bands are frozen until 2026, while council tax continues to rise by 5% a year. There are even rumours that the student loan repayment threshold might soon be lowered. Demand, and therefore inflation, could drop off without a rate rise.

With rising energy, food, and petrol prices contributing to the cost-of-living crisis, the Bank has a very delicate balance to strike. The most recent MPC report expects price rises to outstrip earnings until 2024. Accordingly, rates could still rise to 1% by the end of 2022.

US inflation surges

Pressure on the Federal Reserve is also intensifying as US inflation is now running at 6.2%. This is 1.2 percentage points higher than the UK’s expected peak and represents the highest inflation rate since 1990.

Worryingly, the labour department report shows prices rose 0.9% in October, more than double the 0.4% jump in September. Moreover, energy prices are up 30% and food up 5.3% over the past year.

Like the UK, these pressures are being blamed on global supply chain issues. But last week, Chairman Jerome Powell said that inflation has been ‘longer lasting than anticipated,’ and that it was ‘very difficult to predict the persistence of supply constraints.’

President Jo Biden has also just passed a $1.2 trillion infrastructure bill, and could soon increase social spending by $1.75 trillion. This cash influx is likely to have an additional inflationary effect.

This leaves the currency pair in an interesting position where it seems likely that the UK will raise rates before the US, despite having significantly lower inflation. If it does, then sterling will rise. But with inflation running so high across the pond, the Federal Reserve could emulate the Bank of England's unpredictability, and spring a surprise on unsuspecting traders.

IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.

Please see important Research Disclaimer.

Start trading forex today

Trade the largest and most volatile financial market in the world.

  • Spreads start at just 0.6 points on EUR/USD
  • Analyse market movements with our essential selection of charts
  • Speculate from a range of platforms, including on mobile

Live prices on most popular markets

  • Forex
  • Shares
  • Indices

Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.


Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 20 mins.

The Momentum Report

Get the week’s momentum report sent directly to your inbox every Monday for FREE. The Week Ahead gives you a full calendar of upcoming key events to monitor in the coming week, as well as commentary and insight from our expert analysts on the major indices to watch.

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

You might be interested in…

Find out what charges your trades could incur with our transparent fee structure.

Discover why so many clients choose us, and what makes us a world-leading provider of CFDs.

Stay on top of upcoming market-moving events with our customisable economic calendar.