The UK could become the first major economy to emerge unscathed from a pandemic. This could provide the impetus to justify aggressive interest rate hikes and also support the British currency.
According to Bloomberg, the rapid appreciation in sterling seen over the past four weeks has forced a reduction in the large speculative net short position seen via CFTC reports, although the consensus among economists remains decidedly bearish.
Intuitively, a negative bias toward the pound seems logical. The country's leaders are embroiled in an ever-deepening scandal over their hypocritical approach to pandemic rules. Brexit is another never-ending tragedy, and the UK and EU are set to intensify negotiations next Monday. The country has a clear inflation problem that is likely to get much worse in April when energy price caps are revised and tax hikes are likely.
These reasons are important, but they take on a much softer tone when viewed through the lens of the UK as a world leader in the post-pandemic environment. The number of new cases of COVID-19 has fallen by nearly 50 percent since the January 5 peak. And it still appears to be falling overnight.
Consensus forecasts are already predicting that the UK will grow faster than any other G10 economy this year. Buoyed by such a narrative, the market may conclude that the Bank of England will allow itself to tighten policy, will even be forced to aggressively address the real inflation issue. Instead of four hikes in 2022, which seem ambitious, investors may see this as a potential minimum, Bloomberg reports.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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