June 21, 2023

Pound nears 14-month highs against USD as rate hike looms.

David Huggett runs through the latest movements and looks at the likely impact of another tumultuous week on the mon6ey markets.

The Pound has maintained a strong position close to fourteen-month peaks against the USD, driven by market expectations of an upcoming rate hike by the Bank of England. The central bank has been focused on preventing inflation expectations from becoming entrenched in the domestic economy and is set to announce its monetary policy decision on Thursday.

Analysts anticipate a 25 BSP increase as expected, potentially pushing it up to 4.75%, the highest level since April 2008. This decision will follow the release of UK inflation figures, which are expected to show a significant rise in both the broad Consumer Price Index and the narrower ‘core rate’ compared to the previous year.

The anticipated outcomes align with expectations of a rate hike, most likely resulting in a further strengthening of the Pound, although as always, the real clues will come from the following commentary from the BoE.

The focus remains on these two major events later in the week. The Pound is currently supported by expectations of continued monetary policy tightening by the Bank of England, contrasting with the cautious approach of the FED, as it assesses the impact of previous rate hikes. Additionally, the UK economy has outperformed earlier pessimistic forecasts, further bolstering confidence in the Pound.

The euro may attempt to recover from recent losses against some currency pairs due to the European Central Bank’s recent hawkish interest rate hike, oversold market conditions, and underwhelming macro data.

The European Central Bank raised interest rates by 25 basis points last week, reaching the highest level in 22 years, signalling its intention to continue raising rates in the coming months. Earlier indications of a potential pause in tightening measures have been replaced by ECB President Christine Lagarde’s recent statement that there is still progress to be made. This outlook supports the euro, although it has weakened against the pound in line with previous forecasts.

In summary, the Pound is poised for further gains as markets anticipate a rate hike by the Bank of England, while the euro could see a potential rebound supported by the ECB’s hawkish stance and oversold conditions, albeit with limited gains due to existing long EUR positions.

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