On Friday, there was a more than 1% decline in Sterling, as it was scheduled for another week of declines after the previous one against the US dollar. This is primarily because of the gloomy outlook of the British economy, which worried investors. But, hot US CPI data gave the US dollar a much-needed boost.
Bank of England to Increase Interest Rates
After the US CPI data showed that prices in the country rose higher than expected in the previous month, the British currency declined to a value of under $1.24. This gave rise to concerns that the Federal Reserve would continue being aggressive and would not stop reducing their interest rates by 50 basis points even in September in order to bring down inflation numbers.
It is expected that the Bank of England (BoE) will also increase its interest rate next month, which would be the fifth time it is doing so since September. This has been the steepest hike in rates that have been seen in the last 25 years.
Markets have already priced in an aggressive tightening by the BoE, which resulted in a sharp increase in bond yields this week in both short and medium-dated government bonds. This happened after the signaling from the European Central Bank (ECB) that it would boost interest rates in both July and September. Financial markets are betting that the interest rate will hit 2% in Britain by September and May 2023 will see it reach 3%.
But, Sterling was not able to get any support because the forecast shows that Britain will be the weakest economy in the rich nations in the world next year. Market analysts stated that while the number of hikes that have already been priced in from the Bank of England (BoE) may not necessarily be reflected of the actual course. However, it does not offer the pound much stimulus.
In comparison, the expectations of a higher interest rate from the Fed are justifiable, due to which they are offering support to the dollar because it pushes up Treasury rates.
Pound falls Against Dollar and Euro
There was a 1.3% decline in the British pound at 1428, as it hit $1.2339, which is the lowest it has been in three weeks. Meanwhile, it had dropped by 0.2% against the euro to reach 1.85 pence. However, it appeared to be on its way to having the best week against the currency since April.
According to market analysts, investors should not expect a rate hike of more than 25 basis points by the Bank of England (BoE) and such an increase is unlikely to have an impact on the pound. They added that the major concern for the pound would be when the bank hits a pause in its hiking cycle in the next few months, which would be against the markets. They are expecting a hike of 50 basis points by August or September, but the BoE might not go ahead with it due to the economic outlook.