LONDON: The pound gained versus the euro for a second consecutive day, pulling back from a 1-1/2 month low hit on Monday as investors judged that any monetary tightening by the European Central Bank will significantly lag its British counterpart in the near term.
Versus the euro, the pound edged 0.3% higher at 84.56 pence on Tuesday in London trading after weakening to 84.74 pence on Monday, its lowest levels since late December. Against the dollar, the pound was steady at $1.3540.
“We’re still of the view that in six months’ time, UK rates will be in positive territory,” said Dean Turner, UK economist at UBS Wealth Management. “We’re still happy to see euro/sterling target the 81 level by year-end.”
While the Bank of England delivered a quarter-point hike last week as widely expected, a split vote came as a surprise, as four of the nine Monetary Policy Committee members wanted a 50 basis points move. Money markets are now pricing in another 127 bps of hikes over the remainder of the year.
In contrast, analysts were expecting 50 bps in hikes from the ECB over that period after the ECB opened the door to an interest rate rise later in 2022 at a policy meeting last week.
Despite the widening rate differential expectations between the eurozone and Britain, hedge funds remained more cautious about the pound’s outlook versus the US dollar.
Speculators’ net long positions on the pound against the dollar fell to a three-week low in the week to Feb. 1, futures data from CFTC showed.
Markets were waiting for US inflation data on Thursday which could cement expectations on whether the Federal Reserve will raise interest rates by a quarter point or a half point at a March review. Money markets are now pricing in more than a 60% probability of a 50 bps rate hike.
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