Pound holds ground amid expectations for a large BoE rate hike

Philip McHugh September 28th 2022 - 2 minute read

The pound stabilised on Tuesday in the wake of some hawkish comments from a Bank of England (BoE) policymaker.

Trade in Sterling is mixed so far this morning, with GBP/EUR flat at €1.1171, while GBP/USD slides to $1.0678. GBP/CAD is rangebound at C$1.4722, while GBP/AUD and GBP/NZD rally to AU$1.6743 and NZ$1.9119, respectively.

Coming up, will the ongoing uncertainty surrounding the UK’s budget lead to more GBP volatility today?

What’s been happening?

The pound wavered yesterday, the currency struggling to attract support amid the ongoing fallout from Kwasi Kwarteng’s ‘mini’-budget on Friday.

Sterling was prevented from posting any major losses thanks to some hawkish comments from Bank of England Chief Economist Huw Pill.

Pill suggested the BoE is likely to deliver a ‘significant policy response’ to the budget. Although tempered this by saying the bank should still wait until its next meeting before acting.

The euro, meanwhile, was muted on Tuesday following comments from European Central Bank (ECB) Vice President Luis de Guindos, in which he suggested future interest rate hikes would be data dependant.

Also limiting the appeal of the single currency were reports that the Nord Stream pipelines may have been deliberately sabotaged, pouring gas into the Baltic Sea.

At the same time, the US dollar traded in a narrow range during yesterday’s European session as a prevailing risk-on mood capped demand for the safe-haven currency.

The appeal of the ‘greenback’ was further dented by the release of the latest US durable goods orders as they reported another contraction in order growth last month.

What’s coming up?

Looking ahead, its likely that any movement in the pound will remain tied to the turmoil surrounding the UK government’s budget.

This might see Sterling continue to trade erratically as the budget continues to rattle markets and investors bet on whether we can expect to see a U-turn from Kwarteng or an early intervention from the BoE.

The threat of an escalation of the war in Ukraine may be the main focus for EUR investors, amid the expectation Russia will announce the annexation of occupied territories later in the week.

Meanwhile, USD Investors may look to a series of speeches by Federal Reserve policymakers for fresh impetus today. Could a broadly hawkish outlook help to bolster the US dollar?

Written by
Philip McHugh

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