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Sterling rises further ahead of expected BoE rate hike

Sterling perched at 1-1/2 week highs before central bank vote
Sterling perched at 1-1/2 week highs before central bank vote   -   Copyright  Thomson Reuters 2022
By Reuters

By Julien Ponthus and Saikat Chatterjee

LONDON -The British pound climbed on Wednesday for a fourth session in a row, reaching a 1-1/2-week high against the dollar, as investors firmly held to their expectations that the Bank of England will raise interest rates on Thursday.

Investors have now fully priced a 25-basis-point rise in the BoE’s main interest rate to 0.50% on Feb. 3 and economists polled by Reuters also expect that outcome from the meeting.

In late afternoon trading in London, the pound was up 0.36% at $1.3575 , its highest level since Jan. 21.

At 83.27 pence for a euro, the British currency was also creeping closer to 83.07 pence, its best exchange rate against the common currency since February 2020.

Kit Juckes, head of FX strategy at Societe Generale in London, noted that the pound “found it quite hard getting through” the 83 pence bar, a threshold crossed only a handful of times since 2016.

He argued that the positive sentiment across equity markets was driving risk-on currencies against the dollar and that the policy meetings of both the European Central Bank and the BoE on Thursday were not currently expected to turn out as game changers for currency markets.

Both meetings will, however, be closely watched.

“The guidance provided by the ECB and the BoE tomorrow will provide an opportunity for investors to re-evaluate these policy expectations and this suggests the potential for fresh direction for EUR/GBP”, a research note from Rabobank read.

While the euro edged down against the pound, it gained against the dollar after data showed euro zone inflation rose to a new record high last month, fuelling bets the ECB would possibly need to raise interest rates sooner than expected.

The BoE was among the first off the blocks among its developed market peers to raise interest rates in December and money markets now expect a total of 100 bps in rate hikes from the central bank this year.

While those punchy rate expectations are already priced into current levels of the pound, analysts believe the British currency could potentially extend gains if policymakers strike a more hawkish tone to curb inflation.

Most economists polled by Reuters also believe the BoE will also signal its approach to start unwinding its 895 billion pound ($1.2 trillion) quantitative easing programme. ECILT/GB

Currency markets continued to ignore the latest developments of the political crisis in Britain over lockdown parties at Downing Street, with six Conservative members of parliament now publicly saying they are seeking a vote of confidence on Prime Minister Boris Johnson’s leadership on Wednesday.