Pound surges as markets price in early 2022 rate hike

The pound rocketed higher on Thursday as GBP investors revised their rate hike expectations, in the wake of the Bank of England’s (BoE) latest policy meeting.

Sterling appears to be consolidating these gains so far this morning, with GBP/EUR stable at €1.1680 and GBP/USD flat at $1.3706. GBP/CAD is rangebound at CA$1.7386, while GBP/AUD and GBP/NZD hold steady at AU$1.8837 and NZ$1.9449 respectively.

Looking ahead, will a weakening of German business morale send the euro lower this morning?

What’s been happening?

The pound soared through yesterday’s session, in response to the BoE’s latest interest rate decision.

Whilst the BoE left interest rates at a record low this month, investors were quick to seize on the bank’s forward guidance. in which it suggested that increased inflationary pressure in the UK means that the case for monetary tightening has ‘strengthened’.

The BoE’s hawkish comments triggered a surge in GBP exchange rates as markets began to price in the possibility of a rate hike in as soon as March 2022.

Meanwhile, the US dollar came under some notable selling pressure on Thursday, as a prevailing risk-on mood sapped demand for the safe-haven currency.

This pullback in the US dollar and its negative correlation with the euro helped to limit the single currency’s losses yesterday, following the publication of some lacklustre Eurozone PMI figures.

What’s coming up?

Turning to today’s session, the most high-profile data release looks to be the latest IFO business climate index from Germany, which could place the euro on the back foot as economists forecast another drop in business morale this month.

Also limiting the appeal of the euro will be Germany’s impending General election. Uncertainty over which is likely to cap the upside potential of the single currency as we head into the weekend.

Meanwhile, the publication of the Confederation of British Industry’s (CBI) distributive trade index could offer direction to the pound today. Will a slowing of UK retail sales volumes trim Sterling’s recent gains?

Finally, a speech by Federal Reserve Chair Jerome Powell will be the focus for USD investors today.

Powell may provide fresh impetus for the US dollar later this afternoon, if he expands on the Fed’s tapering plans.