LONDON: The British pound’s early gains fizzled on Wednesday as investors moved to the sidelines before a Federal Reserve statement that might signal a more hawkish policy shift, potentially boosting the dollar.
Some analysts expect the Federal Reserve to announce that it will move more quickly to end its pandemic-era bond purchases, a precursor to raising interest rates. Money markets currently expect the Fed to raise rates at least twice in 2022.
Against a broadly strong dollar, sterling edged 0.1% lower at $1.3220 after being up as much as 0.4% earlier on higher-than-expected inflation data before a Bank of England policy meeting on Thursday.
Markets on Wednesday were assigning more than a 60% probability of a 15 bps interest rate increase by British policymakers, up from 50% on Tuesday. But the emergence of the Omicron variant of the coronavirus may force the British central bank to hold off from tightening policy.
Data released on Wednesday showed British consumer price inflation had surged to its highest in more than 10 years in November, jumping to 5.1% from October’s 4.2%, exceeding all forecasts in a Reuters poll of economists, which had pointed to a rise of 4.7%.
The data came a day after the International Monetary Fund urged the Bank of England to avoid an “inaction bias” when it came to raising interest rates.
“These numbers, along with the IMF’s warning yesterday, clearly strengthen the case for a rate rise tomorrow,” said Rupert Thompson, chief investment officer at Kingswood, a money manager.
“Even so, the uncertainties thrown up by Omicron mean on balance the MPC still looks likely to hold off raising rates until February.”
Money markets are now pricing in a cumulative 22 bps of rate increases by February compared with less than 20 bps on Tuesday.
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