Bank of England

The sterling has boasted one of the most attractive interest rate differentials for months. The Bank of England (BOE) has already hiked its base rate by 1 basis point in 2004, from 3.75 percent to its current 4.75 percent level. A critical factor for the sterling near-term will be actions by the BOE.

If additional tightening is in the pipeline this year, it should continue to underpin strength in the currency.

However, if the BOE moves to the sidelines and aggressive tightening is seen by the Fed, it could open the door for additional pullback in the sterling in the months ahead.

However, some analysts believe the BOE may be nearing the end of its rate hike cycle, at least for the near-term, which could play into the future outlook for interest rate differentials. “I think they are on hold now,” Busch says. “I think we’ll continue to see the sterling go sideways.”

Similar to the greenback, the sterling shifted into a sideways consolidation mode after soaring to a 12 year high at $1.91 in February 2004. Since mid-May, the sterling has been confined within a range of $1.74-$1.89.

Gain’s Dolan was even more pessimistic on the outlook for the sterling, keying in on the interest rate differential outlook.

“The U.K. is more likely to level off and not do anything between now and year-end,” he says. “The pound probably has a fair amount of room to go on the downside, based on interest rate differentials. [They] are going to narrow to the detriment of the pound.”