The GBP USD pair drifted through the 1.22 range on Monday but managed to snap a three-week losing streak thanks to a struggling dollar.
The UK currency’s gentle tailwinds came from rate hike expectations. Last week, the Bank of England (BoE) lifted interest rates by a quarter-point last but remained in the slow lane compared to the US Federal Reserve’s more robust action. However, with inflation soaring, investors expect a half-point rise from the UK central bank at its next meeting and almost 100 basis points of policy tightening by the end of summer.
These expectations were stoked last week by the BoE’s new hawkish message that it may act “forcefully” on interest rates – reinforced by comments from policymaker Catherine Mann on Monday.
Speaking at a Market News International Connect event, Mann said the central bank needs to hike borrowing costs more aggressively to prevent the pound from depreciating against the dollar – a scenario that would push inflation even higher.
“In my view, a more robust policy move … reduces the risk that domestic inflation already embedded is further boosted by inflation imported via a sterling depreciation,” Mann said.
Three members of the nine-strong Monetary Policy Committee (MPC) – including Mann – voted for a 50 basis-point rate rise at the BoE’s policy meeting last week.
Dollar lacks impetus
A federal holiday means investors in the dollar will wait until Tuesday for the first economic indicator of the week from the US economy.
This left the US currency exposed to events across the Atlantic where hawkish comments from the BoE supported the pound.
Two central bank officials – Chief economist Huw Pill and MPC member Silvana Tenreyro – have speaking engagements on Tuesday, providing clues about the BoE’s appetite for more aggressive rate hikes.
Wednesday’s inflation print will be the main yardstick for UK interest rates. Spiralling consumer prices reached a new four-decade high above 9% in May – potentially underscoring the challenge facing the BoE as it considers rate rises to tame them.
Fed chief Jerome Powell will testify before the Senate and the House on Wednesday and Thursday to deliver his biannual monetary policy updates. The Fed pressed the interest rate accelerator in recent months. The most recent rise is the biggest since 1994.
The Chicago Fed National Activity Index for May will hit the headlines on Tuesday before Powell testifies.
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