Sterling steadies near 23-month high

On Tuesday, the Sterling rose to a pre-pandemic high against the euro, boosted by expectations that the Bank of England will raise interest rates further.

The pound had risen 0.1 percent against the euro to 83.35 pence, its highest level against the single currency since February 2020.

It rose 0.2 percent against the dollar to $1.3611, close to its highest level since Nov. 4, when the pound fell 1.5 percent on the day after the Bank of England surprised the market by keeping interest rates unchanged.

Investors

Investors have increased their expectations that the Bank of England will raise interest rates as soon as next month, following a surprise hike of 15 basis points to 0.25 percent in December. According to You-Na Park-Heger, an FX analyst at Commerzbank, the prospect of interest rate hikes by the Bank of England is supporting sterling. However, quite a bit of it is likely to be priced in already, so the GBP rally may begin to lose steam, she added.

According to Jane Foley, head of FX Strategy at Rabobank in London, sterling has benefited from signs of weakness in the US dollar. It was trading well below its 16-month highs against a basket of currencies on Tuesday, despite rising bets this month that the Federal Reserve will raise interest rates sooner than expected. The market already has long USD positions, making it difficult for the greenback to react to continued Fed policy tightening speculation. According to Foley, it could allow cable freedom to rise in the coming weeks.

She anticipates that the market will unwind some of the market’s expectations for BoE rate hikes as pressure on real incomes in the UK becomes more evident as the winter progresses.