The Pound is holding recent gains close to 20-month highs against the Euro and hit a fresh one-month high against the Dollar on Tuesday amid mounting expectations of a rate hike by the Bank of England.
However, according to some critics, a rise in UK rates will further decelerate growth and lead to rising inflation and stagnant growth, which would be unsupportive of Sterling.
"Fading Sterling strength on a BOE hike sounds like a good tentative idea in our view," said Anders Eklöf, a foreign exchange strategist at Swedbank.
"Sterling is unlikely to get lasting support from the BOE raising rates because of supply constraints and already tight labour markets," he added.
"The big question hanging over the Pound’s value is whether a potential interest rate hike by the Bank of England in the short term will have to be reversed further out due to its possible negative impact on the economic recovery," according to George Vessey at Western Union Business Solutions.
The Pound to Euro exchange rate currently stands at 1.1819, having dipped to 1.10 at the start of the year, while the Pound to Dollar exchange rate is at 1.3776, after a fall to 1.3416 at the end of last month, reports Pound Sterling Live.
On Sunday the Governor of the Bank of England Andrew Bailey said the central bank is set to increase interest rates as inflation risks mount. He said at the time: "Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations.”
However, according to Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, the market has misread the BoE Governor’s comments and a rate rise next month is therefore unlikely.
"Markets now see a 70% chance of the MPC hiking Bank Rate next month, up from 33% last week. This is ludicrous, given the 'high option value' the MPC sees in waiting until December, when key labour market data will be available. Risks to market rates all to the downside now," said Tombs.
A downside move in rate rise forecasts may indicate a retreat by Sterling.