Sterling climbs as weaker U.S. dollar lifts UK currency before BoE decision
Sterling strengthens to a seven-week high against the U.S. dollar as investors react to broad dollar weakness and position for the Bank of England's policy decision. The move keeps the pound in focus after the UK budget and amid expectations that the central bank raises interest rates on Thursday.
Highlights
- Sterling rises 0.63% to $1.3495 by 10:22 GMT as a weaker dollar and Bank of England rate hike expectations drive gains.
- Money markets price in a Bank of England rate hike Thursday, while Goldman Sachs sees current hike expectations as stretched versus G10 peers.
- Analysts at BofA Global Research warn a dovish Bank of England hike could pressure sterling, though improving fundamentals may limit lasting downside.
Currency move driven by dollar weakness and rate expectations
As reported by Reuters, the pound rises 0.63% against the dollar to $1.3495 by 10:22 GMT on Wednesday and trades at 83.43 pence per euro, slightly firmer on the day.Sterling benefits from a fragile dollar after Democrats win control of both chambers of the U.S. Congress. The currency also draws support from expectations for Bank of England rate increases, with money market data indicating that traders price in a hike on Thursday.
Market outlook hinges on Bank of England guidance
Investors have paid closer attention to the pound since British finance minister John Healey's budget set out cautious tax and spending plans aimed at supporting households hit by what he described as global economic storms.Higher interest rates typically support a currency, but some analysts say much of the positive outlook is already reflected in sterling. Goldman Sachs analysts say Bank of England hike pricing looks stretched relative to G10 peers and that valuation remains a challenge for the pound.
Some economists polled by Reuters expect the central bank to push back against market expectations for three to four rate increases in 2027. Analysts at BofA Global Research say a dovish hike would be a headwind for sterling, but add that they do not expect lasting damage if fundamentals continue improving.
In our earlier article on expectations for a Bank of England rate hike to 4.0% in November, we noted that persistent inflation pressures and stronger-than-expected UK data were pushing economists toward a near-term tightening call. The piece also highlighted that forecasts still differed on how far rates might go after an initial move, with policymakers’ guidance and the inflation outlook seen as the key drivers.
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