Sterling heads back towards 6-month peak, outlook murky

ENGLAND: The British pound was creeping back up towards the previous week's six-month peak against the U.S. dollar on Monday, days after the Bank of England (BoE) raised the benchmark interest rate to its highest level since 2008.

The BoE delivered its ninth consecutive interest rate hike on Thursday, raising rates by 50 basis points (bps) to 3.5% as the central bank battled with double-digit inflation.

The British pound was creeping back up towards the previous week's six-month peak against the U.S. dollar on Monday, days after the Bank of England (BoE) raised the benchmark interest rate to its highest level since 2008.

The BoE delivered its ninth consecutive interest rate hike on Thursday, raising rates by 50 basis points (bps) to 3.5% as the central bank battled with double-digit inflation.

However, with two policymakers in the nine-person committee favouring the status quo on interest rates, markets view that the central bank may be getting closer to the end of its tightening cycle as the economy looks set to slow in 2023.

"The extent of sterling's rally over the past couple of months has wrong-footed many investors," said George Vessey, UK currency strategist at Western Union Business Solutions.

"With markets still pricing in a 4.5% peak in BoE rates next year, there may be room for further pound weakness if the BoE stops raising rates at around 4% as they forecast," Vessey added.

After slumping to a record low of $1.0327 in September, the pound has staged a recovery and by 1028 GMT, sterling was up 0.6% against a softer dollar at $1.2210. It reached its highest level since June last week at $1.2446.

The euro was down 0.1% against the pound at 86.94 pence. The single currency hit its highest level in a month against the sterling on Thursday after the BoE and European Central Bank (ECB) decisions.

The ECB also raised its key interest rates on Thursday but was much more hawkish than the BoE, signalling larger rate hikes with inflation forecast to stay above the central bank's 2% target through 2025. Analysts at ING believe sterling could be vulnerable against the euro, targeting a move to 89 pence in the first quarter of 2023.

"The ECB would clearly like a stronger euro to help out with its battle against inflation," ING's Chris Turner said, noting that the euro will need to rally against the dollar, renminbi and pound - those with the highest weightage in the trade-weighted euro index.

"Of the three, we would say that sterling is the most vulnerable given that the Bank of England is closer to ending its tightening cycle than the Fed and that the UK's large current account deficit leaves sterling vulnerable in a global slowdown," Turned added.