This Great Graphic, composed on Bloomberg, shows sterling’s exchange rate against the dollar (white line) and the 10-year interest rate differential between the US and UK (yellow line):
The interest rate differential has been trending higher since early August. By early September, the UK was offering a premium over the US. The premium jumped in response to the Fed’s decision last month not to slow its long-term asset purchases.
It is not necessarily a tight fit. The UK’s interest rate premium peaked on September 18. Sterling pulled back from the Fed’s induced rally, but then climbed to new multi-month highs on October 1. The premium has stabilized in recent days, but sterling is the weakest of the majors this week, losing about 0.5% against the dollar. The EU agriculture payments and flows thought to be related to the Verizon/Vodafone deal may have helped top up sterling’s advance. Support is pegged now near $1.60, but the low since the FOMC meeting is nearer $1.5955.
This piece is cross-posted from Marc to Market with permission.