18 Nov 2021
Sterling held at a one-week high against the Dollar on Thursday, as expectations the Bank of England will hike policy rates sooner rather than later to combat inflation increase, which would provide a boost to the Pound.
The Pound moved up this week as inflation and hopeful economic data hiked expectation the central bank will be among the first of global policymakers to increase rates for the first time since the pandemic.
These expectations were reinforced further by data out on Tuesday that the UK job market has coped with the end of the furlough scheme, easing a major worry regarding the risks of tightening monetary policy.
Nevertheless, investors are still concerned as to the timing of any move by the central bank, after the Bank of England surprised markets earlier in November by holding rates steady when many understood a hike was on the way, Reuters reports.
In early Thursday trading, the Pound held flat against the Dollar at $1.3495. Sterling was consolidating gains against the Euro, hitting a 21-month high on Wednesday after increasing 2.4% over the past fortnight. The Pound now stands at 83.99 pence.
Although rate hike expectations are supportive of the Pound for now, according to Citi analysts on Thursday, there are longer-term fears for the currency associated with the EU and UK over the country’s exit from the trading bloc.
Relations between London and Brussels have worsened over the past weeks after the UK threated to initiate an emergency clause – Article 16 – which may lead to a trade war.
Should this be the case, Sterling could drop to $1.25, said the Citi analysts, if the EU imposes tariffs in retaliation.