Sterling Hits One-Week High Due to Aggressive BoE

On Thursday, the British pound managed to reach one-week highs against both, the US dollar as well as the euro. The currency recouped losses of earlier sessions, with the greenback seeing broad weakening, as investors bet on the Bank of England (BoE) taking a more aggressive stance on tightening in monetary policy, in accordance with the moves made by other central banks recently. Analysts also said that some technical factors were also at play in terms of the pound’s recovery.

The Pound Recovers

The British currency managed to post the largest percentage gain made in a day against the US dollar since October 2020. As far as the euro is concerned, Sterling had its best day since May this year. On Thursday, the BoE had a meeting scheduled and it raised the interest rates by 25 basis points, which was less that forecasted by some in light of the soaring inflation.

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Market analysts said that the sharp rebound in sterling shows that the market is confident about aggressive rise in interest hikes in the second half of the year. Swap markets had also begun to price in an interest rate hike of about 100 basis points by the Bank of England in the next two meetings till September. Before the meeting on Thursday, they had priced in the MPC increasing the interest rate by 75 basis points by then.

Analysts said that the Monetary Policy Committee (MPC) of the central bank would continue to increase rates in every meeting for the rest of the year. But, they added that it was likely going to do this by 50 basis points in order to appease investors. They said that expectations of tightening monetary policies globally have gone so high that a rise of 25 basis points is no longer considered sufficient.

Interest Rate Hikes to Support the Pound

Sterling was last trading at a value of $1.2367, up by 1.6%, after it had reached a high of one-week at $1.2405. The euro also declined to a week-low against the British currency and was last down at 85.52 pence, which is a 0.4% decline.

There had been expectations of a 25 basis points hike by the Bank of England, especially after the US Federal Reserve delivered its biggest interest rate hike of 75 basis points since 1994 in its Wednesday meeting. Then, the markets were shocked when the Swiss National Bank (SNB) unexpectedly announced a hike of its own on Thursday.

Even though the increase by BoE was smaller, it is the fifth straight hike by the bank since December, as the central bank is trying to combat inflation without damaging the economy. According to investors and analysts alike, this hike in the interest rate will provide support to the pound, but the currency remains under pressure in the long-run against the buoyant US dollar.

There was a 2.58% decline in the FTSE 100 index in the UK, while 10-year government bond yields had climbed to 2.6% on the same day.

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