By Samuel Indyk
LONDON -The British pound rose against the U.S. dollar on Wednesday, supported by optimism surrounding negotiations between Ukraine and Russia, though a Bank of England rate decision on Thursday capped gains.
New talk of compromise from both Moscow and Kyiv on a status for Ukraine outside of NATO lifted hope for a potential breakthrough after three weeks of war.
Although the pound gained against the dollar, it was little changed against the euro and continues to struggle to recoup losses related to the war in Ukraine more than other European currencies.
"This might be related to some wait-and-see approach ahead of tomorrow’s Bank of England meeting," ING FX strategist Francesco Pesole said.
"A rate hike combined with more hawkish language could allow the pound to play catch-up with the benign market environment and trigger some EUR/GBP weakness," Pesole added.
A similar view is shared by Dominic Bunning, head of European FX research at HSBC Bank, who said that intensifying inflationary pressures due to surging commodity prices and strong British data means there is room for a relatively hawkish outcome in terms of the BoE's vote split.
"Should we see further calls for 50bp hikes this week by some MPC members, then we would expect GBP to bounce," Bunning said.
The pound rose as much as 0.5% against the U.S. dollar to trade above $1.3100 for the first time since March 11.
Against the euro, sterling was little changed at 83.92 pence.
The upcoming policy announcements from the Bank of England and Federal Reserve have pushed sterling overnight implied volatility near its highest in 15 months.
"GBP/USD is rather delicately poised ahead of this evening’s FOMC, and tomorrow’s BoE decisions, with overnight implied volatility approaching the December 2020 highs seen last week," said Michael Brown, head of market intelligence at Caxton.
Both central banks are seen raising their respective benchmark interest rate by 25 basis points.