Insight & action

As Rates Rise, Bet on the British Pound

Global central banks are becoming less accommodative. Eleven of 33 have begun to raise rates, according to data compiled by Ned Davis Research Group.

Central banks in six countries have raised rates so far this year: Brazil, Colombia, India, New Zealand, Russia and South Africa. In each case, the local currencies have appreciated, as restrictive policy implies tighter money supply.

Alejandra Grindal, Ned Davis Research's senior international economist, compiled the data for her monthly Macro Insights newsletter, available to the firm's clients. She says global tightening tends to peak about 70 percent, coinciding with peak economic cycles and maximum industrial production. Given the current observation of 33 percent, she tells clients the global economy is just beginning to return to "solid footing."

Ms. Grindal also offers an insight into which central bank is likely to make the next move: the Bank of England.

Ms. Grindal is referring to comments from Bank of England Governor Mark Carney, appearing in the minutes from the most recent BoE meeting. Specifically:

"The relatively low probability attached to a bank rate increase this year implied by some financial market prices is somewhat surprising."

While she acknowledges he has since scaled back his "surprise," she nonetheless argues the stage has been set for an increase.

Since all six currencies have appreciated for countries where rates have risen this year, buying the pound follows logically. Looking at the 10-year chart of the British Pound, we see plenty of room for upside.

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