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Published on December 5th, 2015 | by Pete

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Sterling faces Gloomy Outlook as Fed Hike Looms

It’s very likely that we’ll see the pound fall to 1.50 against the US dollar in the coming days, which would be the lowest figure in the last six months of trading. This comes from a combination of uninspiring outlook from the Bank of England, and the potential for good US jobs data which will almost certainly trigger the Fed’s interest rate hike.

In short, higher interest rates show a strong economy that is likely to attract investment – the problem is that when that attractor is the US, that investment tends to flow from everywhere, and not even the pound is safe. Or at least, the pound isn’t safe as long as the Bank of England continues to put off any interest rate hikes, and this seems to be something that will continue as long as inflation remains as low as it has been.

Having said that, there’s certainly no shortage of analysts that believe just a small positive shift in the rate of inflation could well instigate an interest rate hike. The current likelihood is however that it will be the end of next year, and possibly even 2017 before the BoE decides to make those changes, but time will certainly tell. Some analysts believe that the UK will follow the US in about six months, which would take us to about May 2016, assuming that the US Federal Reserve raises those interest rates next month, as many expect. For further analyst insight, it’s probably worth monitoring what those from forex brokers like Oanda have to say.

Interestingly, it wasn’t that long ago that there was debate over which of the two countries would be the first to raise rates, but clearly there is now no question at all. The Fed have been putting it off until they’ve seen good jobs data, and that is widely expected to land on Fed Chairman Janet Yellen’s desk in the coming days and weeks. Indeed, there are very few signals that suggest the dollar will show any weakness towards the pound, and trading in the high 1.40s could be a fixture for a while to come.

It’s not all terrible news for the pound though; it’s currently around an eight-year high against the euro, with the prospect of quantitative easing and even perhaps an interest rate cut from the European Central Bank giving hope that it may break even higher ground up into the upper reaches of the 1.40s.

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