BOE hike expectations push sterling to two-week high

[LONDON] Sterling hit a two-week high on Thursday, building on the previous session's gains, as traders focused on hopes that a post-Brexit trade war with the European Union will be avoided and on expectations that the Bank of England (BOE) will increase rates this year.

Two BOE policymakers are expected to give speeches later in the day and investors will be closely watching for any signs that markets got ahead of themselves in pricing a rise in interest rates before the end of the year.

"Should they fail to push back against the aggressive, early pricing of BOE rate hikes, GBP could get a further lift", ING analysts wrote in a morning note.

The BOE, facing a rise in inflation, looks set to be the first major central bank to raise interest rates since the beginning of the pandemic.

The pound jumped against the US dollar on Monday after BOE governor Andrew Bailey stressed the need to prevent inflation from becoming permanently embedded, and fellow policymaker Michael Saunders said households must brace for "significantly earlier" interest rate rises.

At 0841 GMT on Thursday, sterling rose 0.3 per cent versus the US dollar to US$1.3704.

Against the euro, it ticked up 0.11 per cent at 84.78 after briefly touching a two-month high.

For some analysts, the negotiations with Brussels to ease the transit of goods to Northern Ireland and general post-Brexit tensions are likely to keep a lid on the British currency.

"The British Premier got things wrong so frequently during the Brexit negotiations that a stubborn British position only entails further political and economic risks", argued Commerzbank strategist Ulrich Leuchtmann.

"Those make a stronger sterling impossible, despite rapid Bank of England rate hikes", Leuchtmann said, adding that despite hawkish comments from BOE policy makers, "sterling was only able to retrace the losses recorded in September".

REUTERS