Sterling steady as rate hike expectations grow

The pound held at a one-week high against the dollar on Thursday, as expectations mount that Britains central bank will act sooner rather than later to hike policy rates in order to combat inflation, which would in turn boost sterling.

The pound held at a one-week high against the dollar on Thursday, as expectations mount that Britains central bank will act sooner rather than later to hike policy rates in order to combat inflation, which would in turn boost sterling.

Sterling has edged up this week as inflation and encouraging economic data fuelled speculation the Bank of England (BoE) will act first among major global policymakers to raise rates for the first time since the COVID-19 pandemic hit.

Those expectations were further bolstered by data on Tuesday showing Britain‘s job market had weathered the end of the government’s furlough support scheme, easing a major worry about the risks of tightening monetary policy.

Investors remain wary about the timing of any move, however, after the BoE surprised markets earlier this month by keeping rates steady when many had understood the hike was coming.

At 0852 GMT, sterling was flat against the dollar at $1.3495. It was consolidating gains versus the euro, against which it hit a 21-month high on Wednesday after rising 2.4% in the last two weeks. It is now at 83.99 pence.

While rate hike expectations support the pound for now, analysts at Citi said on Thursday there were longer term concerns for the currency amid wrangling between the European Union and Britain over the latters exit from the trading bloc.

Relations between Brussels and London have soured in recent weeks after Britain, unhappy with the deal it signed up to in 2020, threatened to trigger an emergency clause known as Article 16, potentially leading to a trade war.

Such an action could send sterling as low as $1.25, the Citi analysts warned, if the EU imposed tariffs in response.

(Reporting by Lawrence White; Editing by Mark Potter)