The British pound edged higher on Thursday but was still trading near a 21-month low against a buoyant U.S. dollar that has hit multi-year peaks against both the Japanese yen and euro.
At 0747 GMT, sterling was up 0.1% against the dollar at $1.25615. It had earlier traded below $1.25 for the first time since July 2020.
Against the euro, the pound was up 0.1% at 84.07 pence.
“In the face of a powerful dollar bull trend, GBP/USD has crumbled,” ING analysts said in a note.
“Perhaps the only thing supporting cable (pound/dollar) at 1.25 is the fact that it has come a long way quite quickly.”
Expectations of aggressive Fed tightening this year have pushed yields on U.S. 10-year notes around 45 basis points this month, in turn sending the dollar index to a five-year high.
Meanwhile, the Bank of England’s Monetary Policy Committee is scheduled to meet next week and looks set to lift its policy interest rate by 25 basis points, marking the fourth consecutive meeting in which rates have been increased.
Sterling edges up from 21-month low vs dollar
Morgan Stanley analysts expect the deteriorating growth outlook to push the BoE to slow its pace of tightening.
“If the BoE once again focuses on the coming growth slowdown and the softer medium-term inflation outlook at market-implied rates, this would reaffirm our view that it will not hesitate to pause its hiking cycle as growth data deteriorate further,” Morgan Stanley analysts wrote.
Money markets are currently pricing in around 145 basis points of further tightening by the end of the year, the equivalent of almost six 25 basis point rises.
Morgan Stanley expects just two more 25 basis point rises in 2022 - in May and June - before the central bank takes a pause in response to slowing growth.
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