LONDON, Jan 20 – The British pound held near a 23-month high against the euro and rose against a weaker dollar today, still supported by expectations of interest rate hikes UK.
Money markets are currently pricing in more than 100 basis points (bps) of interest rate hikes in 2022 and an 87% chance of a 25 bps increase in February, after data yesterday showed that inflation in the UK rose faster than expected to reach its highest level in nearly 30 years in December.
Domestic politics is not a prejudicial sentiment, after Prime Minister Boris Johnson rejected calls to resign on Wednesday, struggling to save his post as Prime Minister amid a growing revolt within his party over the a series of lockdown parties in Downing Street.
The pound was stable at 83.33 pence to the euro, a striking distance from a 23-month high of 83.13 hit yesterday.
“If anything, there is a risk that the BoE (Bank of England) will disappoint the market by acting less decisively” at its February meeting, Commerzbank analysts said, adding that “a lot has already been priced in” in terms of future rate hikes.
“Market rate speculation may be able to provide a bit more support. However, the risk of profit taking is likely to increase,” they added.
In the broader market, commodity prices boosted riskier currencies while the dollar index fell slightly.
The pound gained 0.15% against the greenback at US$1.3633.
“Unsurprisingly, political risk has not hurt the pound, where the focus remains squarely on whether the BoE will rise 25bp on Feb. 3,” ING analysts said, adding that they “continue to favor the drift of EUR/GBP towards the 0.8270/80 zone”.
Berenberg economists see a change in prime minister as a positive for UK markets, as the Conservative Party would likely choose its replacement based on who has the best chance of beating Labor leader Keir Starmer in an election.
They mentioned Finance Minister Rishi Sunak, Foreign Minister Liz Truss and Health and Social Care Committee Chairman Jeremy Hunt.
They argued that a new prime minister would pursue “policies similar to Johnson’s in a much calmer and more deliberate way”.
Johnson will not be leaving, Health Secretary Sajid Javid said on Thursday when asked if he would like to run for prime minister. —Reuters