Pound bolstered by BoE rate hike bets

The pound strengthened on Tuesday as it was underpinned by hawkish Bank of England (BoE) interest rate expectations.

Sterling is trading in a wide range so far this morning, with GBP/EUR ticking up to €1.1583, while GBP/USD slips to $1.2369. GBP/CAD is rangebound at CA$1.6874, while GBP/AUD and GBP/NZD climb to AU$1.9088 and NZ$2.0609, respectively.

Looking ahead, will a drop in German inflation pull the euro lower this afternoon?

What’s been happening?

The pound enjoyed strong support yesterday, the currency drawing support from expectations the Bank of England will continue to raise interest rates in the coming months.

Some analysts are even going so far as to suggest UK interest rates might need to rise to 6% if the BoE is to bring UK inflation back under control.

Furthermore, economists at Goldman Sachs suggest the bank’s next cut may be further off than previously thought. As they predict UK inflation won’t fall back within the BoE’s target range until 2025.

The euro faced some headwinds on Tuesday, after Eurozone economic sentiment deteriorated more than expected in May amid more warnings regarding the Eurozone’s growth prospects.

However, the euro was still able to trend broadly higher thanks to its negative correlation with the US dollar.

This pullback in USD exchange rates was linked to positive risk appetite, amid hopes the US is close to resolving its debt ceiling crisis.

What’s coming up?

The highlight of today’s trading session will likely be Germany’s consumer price index.

May’s preliminary CPI figures are expected to report a sharp fall in German inflation. This is likely to dampen expectations for the Eurozone figures on Thursday and weaken European Central Bank (ECB) rate hike bets.

On the other hand, a speech by ECB President Christine Lagarde could help to prop up the euro if she suggests the bank needs to do more to bring inflation under control.

In the US the focus will be on the latest JOLTs job opening figures. Signs the US labour market is slowing could temper Federal Reserve rate hike bets and pressure the US dollar.

Finally, in the continued absence of any notable UK data releases, movement in the pound is likely to remain linked to BoE rate speculation. If GBP investors remain confident in the BoE delivering several more rate hikes this year, Sterling could strengthen.