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Pound nears two and a half-month highs

17 Jan 2022

Sterling moved higher on Monday, close to a two and a half-month high, as investors increased bets the Bank of England will hike interest rates as soon as February.

Recent data heightened forecasts the UK economy is making a robust rebound from the pandemic.

On Friday, GDP data revealed Britain’s economy is bigger than before the initial Covid lockdown, whilst employment data published on Tuesday is predicted to be strong, Reuters reports.

The markets have fully priced in one rate hike by February and one percentage point rise in rates by the end of this year.

Furthermore, the Pound edged up against the U.S. Dollar by 0.1% at $1.3689, after last week reaching an end of October top of $1.3749. Sterling remained steady against the Euro at 83.51 cents.

The Pound has rallied close to 4% since the lows seen in December, as currency markets have been boosted by a more positive global growth outlook leading to a swing in trading positions by hedge funds on Sterling, the Reuters report goes on to add.

In addition, the recent hawkish stance by the Federal Reserve has increased the Pound’s appeal as investors believe it may lead to a rise in confidence for the Bank of England hiking rates and tightening policy.

"The Fed’s shift towards more aggressive policy action will likely push the market to expect similar moves from central banks like the BoE that were already taking steps in that direction," according to Goldman Sachs strategists.

"Within this context, it is also worth noting that the Fed’s apparent preference for earlier balance sheet action makes the BoE’s own runoff plans less idiosyncratic, which we though could have held back GBP’s response to policy action," they said, reducing the Euro/Pound forecast to 83 pence over the coming three months from a previous figure of 86 pence.