Sterling wobbles at two-week lows as traders cut bets on jumbo UK hike By Reuters
Published Jul 28, 2023 11:40
Updated Jul 28, 2023 11:46
© Reuters. FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company’s headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo
By Amanda Cooper
LONDON (Reuters) – The pound edged higher on Friday but hovered near two-week lows after a string of central bank decisions this week reinforced expectations that the Bank of England will not deliver another jumbo rate hike next week.
Against the yen, sterling fell earlier by as much as 1.1% to its lowest in over a month, after the Bank of Japan said it would make its yield curve control policy more flexible, which investors initially took as a sign the central bank might be edging towards a shift in its ultra-loose monetary policy.
The sharp rally in the yen reversed, leaving sterling up 0.2% on the day at 178.77 yen.
The BoE meets on Aug 3 and, right now, traders are leaning more towards a rate increase of 25 basis points, but still see a 25% chance of another half-point rise.
“The pound is struggling to book gains amid diminishing expectations that the Bank of England will be able to continue hiking rates aggressively,” City Index strategist Fiona Cincotta said.
Investors are still betting heavily on a stronger pound and hold their most valuable bullish bet on sterling since 2014.
But interest-rate differentials, which have been one of the major upward drivers for sterling this year, have eroded this month, as the likelihood of a rise in the UK to beyond 6% from 5% right now, has diminished in line with data that has shown inflation is cooling and parts of the economy are slowing.
As a result, the premium of two-year gilt yields, which respond the most to changes in rate expectations, over two-year Treasury yields has collapsed to almost zero this month, from a multi-year high of around 45 basis points.
The Fed this week left open the possibility of more rate increases and excluded easing financial conditions anytime soon, which in theory supports the dollar.
European Central Bank President Christine Lagarde on Thursday signalled that she did not believe there was much more ground to cover in terms of rate hikes and that any decisions on policy would depend on incoming data.
The pound is now heading for a weekly gain of 1.1% against the euro, its largest this year.
Sterling wobbles at two-week lows as traders cut bets on jumbo UK hike
© 2007-2023 Fusion Media Limited. All Rights Reserved.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.