Wednesday, February 21

Sterling edges higher versus euro, falls against dollar

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Sterling edged higher versus the euro on Monday, with investors focusing on the Bank of England’s next moves to tame inflation while avoiding recession risks.

The pound lost ground against a strengthening dollar as concerns about a prolonged war in Ukraine boosted demand for safe-haven assets.

Bank of England Governor Andrew Bailey will give a speech on Monday; Deputy Governor Ben Broadbent will speak on Wednesday.

“We will be paying close attention to any clues around how the Monetary Policy Committee” may balance the need of bringing inflation down to its 2% target against avoiding an economic downturn, Deutsche Bank analysts said in their weekly note.

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The pound rose 0.05% to 83.32 pence per euro/

Against the US dollar, it fell 0.25% to $1.315, not far from the $1.3 it hit on March 15, the lowest level since November 2020.

“EUR and GBP have indeed moved in tandem in recent weeks, and EUR/GBP may not weaken much more below the 0.8300 mark,” ING analysts said in a note to clients.

“Cable, instead, may well extend its current downtrend towards the key 1.3000 support,” they added.

Recent policy updates from the BoE and Fed kept downward pressure on Sterling as the BoE’s last monetary policy meeting signaled more caution over plans for further policy tightening.

But from now on, the market reaction might not follow the usual path in which the pound strengthens when rates rise.

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“This is the second consecutive meeting where the BoE has hiked rates with a tinge of regret and goes to heart of why we think UK rate hikes may not necessarily be constructive for the pound,” BofA analysts said in a research note.

The BoE raised interest rates on March 17 but it softened its language on the need for more increases.

“Simply put, the Bank of England is hiking for the wrong reasons and sounding defensive whilst the Fed is hiking for the right reasons and sounding increasingly hawkish,” they added.

BofA’s proprietary BoE Mood Indicator recently rose to its most hawkish reading on record. (Reporting by Stefano Rebaudo; Editing by Bradley Perrett)