Sterling rose to a three week high against the euro and against a basket of currencies on Monday on mounting expectations the Bank of England will raise interest rates by the middle of the year. The Bank of England's Monetary Policy Committee (MPC) meets on Thursday and is widely expected to keep the bank rate at 0.5 percent.
However, investors have been pricing in a growing risk of a hike as early as this week, which has lifted the pound. Markets are now fully pricing in a rate rise by May and giving a 22 percent risk of a hike on Thursday. The euro was down 0.4 percent at 84.07 pence, having dropped to 83.89 pence, its lowest since January 19, as investors anticipated the BoE would move faster than the European Central Bank in raising the cost of borrowing. It was trading below its 200-day moving average of 84.54 pence, which technical analysts said suggested more losses could be on the way. The pound's gains against the euro helped lift sterling's trade-weighted index to 81.8, also a three-week high.
Against an otherwise firmer dollar, sterling edged up 0.1 percent to $1.6112, off a session high of $1.6186. Last week, the pound hit a three-month high of $1.6279 and chartists say that level is likely to provide near-term resistance. Speculation has been growing since the minutes of the January meeting revealed BoE policymaker Martin Weale joined Andrew Sentance in voting for a 25 basis point hike, helped also by some firmer UK data and more hawkish BoE commentary.
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