By Alun John
SINGAPORE/LONDON – Sterling slipped against the dollar and the euro on Thursday as the Bank of England raised interest rates by 50 basis points but hinted its tightening cycle was nearing an end, while the European Central Bank is expected to remain hawkish later.
Thursday’s central bank meetings come a day after the U.S. Federal Reserve slowed the pace of its rate rises to 25 basis points, saying it had turned a corner in the fight against inflation, its first explicit acknowledgment that price increases are slowing.
That underpinned market expectations that the end of the U.S. central bank’s rate-rise campaign is near and cuts could follow.
The pound fell to a session low of $1.2276 after the Bank of England raised rates to 4.0% before recovering slightly to stand 0.63% lower on the day. It had rallied on Wednesday, in line with other major currencies, as markets heard a dovish message from the Fed.
The UK central bank’s Monetary Police Committee(MPC) said further interest rate hikes would hinge on evidence of more persistent price pressures appearing, representing a signal to investors that its sharp run of rate hikes might be coming to an end.
The euro rose 0.7% to 89.4 pence, its highest level since September and the turmoil that followed then British Prime Minister’s Liz Truss’ economic policy.
Versus the dollar the European common currency was at $1.1034, just off a 10-month peak against the dollar hit in Asia trade but holding its 1.2% gain from the previous day after the Fed’s meeting.
“There seems to be a preference to sell sterling especially against the euro,” said Piotr Matys, senior fx analyst at Intouch Capital Markets. “Investors adopted such a preference back in December when the BOE delivered a dovish 50 bps bike and on the same day (ECB) President Lagarde sounded significantly more hawkish, and we may witness similar situation today.
He added that the outlook for the UK economy is still quite challenging compared to that of the euro zone and United States.
“That is why GBP, after a knee-jerk reaction, resumed its decline.”
The ECB will announce its rate decision at 1315 GMT.
“A 50bp hike is widely expected as is a hawkish message that will support market pricing of a further 75-100 bpa of tightening into the summer,” said Chris Turner, global head of markets at ING, in a note.
“A sharp narrowing in rate differentials stands to become a bigger driver of EUR/USD this year and should carry it to the $1.15 area in the second quarter.
Turner said the derivatives market shows the smallest premium in dollar rates over euro equivalents since late 2021.
The Australian dollar hit a new eight-month high of $0.7158 in early Asia trade, having gained 1.2% on Wednesday, while the Swiss franc firmed to its strongest since late 2021.
Against a basket of currencies, the U.S. dollar index fell more than 1% to a fresh nine-month low of 100.80 on Wednesday, and traded just above that on Thursday.
Friday’s U.S. nonfarm payrolls report will be the next test of the Fed’s fight against inflation, though official statistics on Wednesday showed that job openings had unexpectedly risen in December, pointing to a still-tight labour market.