The Mexican peso is the only major currency to have appreciated against sterling this year (and then only by less than 1%). The trade-weighted sterling is the highest it has been since late 2008, when the currency was in the midst of its epochal devaluation. The strength of sterling has been in part due to some safe-haven flows from the Middle East (where sometimes GBP is seen as a preferable safe-haven to the USD or CHF), but this is not the fundamental driver.

Instead, the temporary fall in inflation has boosted the real base rate, giving GBP a lift.

However, our UK Future Inflation Index, which correctly anticipated in March the larger than expected CPI prints for February and March, points to inflation continuing to rise over the next 3-4 months before taking another breather (for how long we don’t know until our index updates).

This will put downward pressure on UK real interest rates, and thus likely sterling too. The currencies that could perform the best against sterling over the next few months are the USD, JPY and the BRL.