The pound ticked 0.1% higher on Tuesday to 1.30389, snapping a three-day losing streak against the dollar as 10-year British government bond yields jumped to their highest since December 2015.
Investors remain cautious about the pound’s prospects, however, with the UK currency within touching distance of a November 2020 low of 1.2973 hit last week.
Despite British yields extending gains recently, expectations have dampened that the Bank of England (BoE) will match the US Federal Reserve (Fed) in raising interest rates aggressively to curb inflation.
Economic data published last week showed British consumer price inflation accelerated in March to 7% – its highest since 1981. However, markets have begun reining in BoE rate hike expectations for the rest of the year.
Dollar supported by interest rate expectations
The dollar continued to be supported by policy tightening expectations at the start of the week, as investors prepared for hawkish action from the Fed to tackle inflation – with multiple half a percentage-point rate hikes in the offing.
St. Louis Federal Reserve Bank President James Bullard – who recently made a case for increasing interest rates to 3.5% by the end of the year – said on Monday that US inflation is “far too high,”
Speaking at a virtual event held by the Council on Foreign Relations, Bullard said: “What we need to do right now is get expeditiously to neutral and then go from there,”
Bullard also outlined the need to reduce the US central bank’s balance sheet, though he does not think it should start offloading bonds unless inflation does not recede as the Fed expects.
A quiet week in the UK economic calendar means investors will focus on a speech from BoE governor Andrew Bailey on Thursday for clues on the pace of future monetary policy tightening.
The first economic indicator to be released from the UK economy this week hits the headlines overnight on Thursday, with UK consumer confidence expected to deteriorate further amid the war in Ukraine and sky-high inflation.
The next notable data sets from the US are slated for release on Thursday: initial jobless claims for the week ended 15 April and the Philadelphia Fed manufacturing survey for April.
A speech on Thursday by Fed chair Jerome Powell may offer signs about how aggressively US rate-setters will raise borrowing costs this year after the annual pace of consumer price growth reached 8.5% in March.