Sterling gains as focus falls on pace of US rate hikes

Sterling yesterday rose to its highest point since September as weak inflation data in the US weighed on the dollar, while traders are increasingly betting on higher
interest rates in the UK.

Sterling, which crossed $1.30 and rose against all of its major peers yesterday, has largely defied signs that the UK economy is slowing, with some Bank of England policymakers calling for higher rates.

Prospects of another US Federal Reserve hike meanwhile have fallen this week,
with US consumer price
data falling short of analyst expectations, and chair Janet Yellen striking a more dovish tone over two days in front of politicianss.

“The outperformance of the pound does stand out,” said Lee Hardman, a London-based foreign-exchange strategist at MUFG, which forecasts the pound rising to $1.35 by the end of the year. “We think the Bank of England will be the next
central bank to raise rates.”

Sterling climbed up to 1.2% to over $1.30, its highest since September, and gained against the euro to 87.51 pence. Ahead of next week’s ECB meeting, “expectations of a hawkish shift are high”, without which the euro could weaken against
sterling, Nomura analysts said.

They also expect the Bank of England to raise rates in August. Markets currently price in about a 57% chance of a 25-basis-point hike in the UK by the end of this year.

Analysts at Citigroup differ from Nomura and don’t think the Bank of
England can tighten policy in the face of a slowing economy. US stocks and bonds rallied along with oil and gold, as US inflation data came in short of Federal
Reserve expectations, spotlighting concerns of some central bankers about additional interest rate hikes.

The S&P 500 Index was
up slightly. Treasuries headed for their first weekly gain in three, bolstered by Yellen’s gradualist tone to policy tightening as inflation languishes below the central bank’s 2% target.

JP Morgan Chase and Citigroup reported quarterly earnings that were largely in line with expectations, although fixed-income
revenue was hurt by low volatility. The pace of recent inflation in the world’s
largest economy has become even more pertinent after Yellen hinted in a congressional testimony this week that sluggish price rises have structural causes.

The soft June consumer price index number continues more than a quarter of poor progress at a time when some Fed officials are hinging their support for further rate rises on the inflation outlook in this figure.

US retail sales unexpectedly dropped for a second month in June. European stocks were little changed. 

Bloomberg


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