Pound strengthens as traders assess interest rate prospects

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The British pound rose against the dollar and euro on Monday, pulling away from two-week lows as risk sentiment improved and traders focused on any signals that the Bank of England could raise interest rates faster than expected.

At 1413 GMT the pound was up 0.31% against the dollar at $1.21330. It was also stronger against the euro, rising 0.17% to 86.050 pence.

As risk sentiment picked up in global FX markets, the pound also rallied against so-called safe-haven currencies, the Swiss franc and Japanese yen.

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Sterling last week concluded its steepest six-month drop since 2016, down more than 10% against the dollar this year.

The focus remains on the UK’s slowing economy, with the BoE tasked with tackling soaring inflation while avoiding a recession.

The BoE has raised rates five times since December and its next scheduled rate announcement is Aug. 4. Some market players expect a bigger increase of 50 basis points (bps) at the next meeting.

“Any indication that policymakers are erring towards raising rates by 50 basis points at the next MPC meeting in August would be positive for the pound and may trigger a recovery rally from currently suppressed levels,” Matthew Ryan, head of market strategy at global financial services company Ebury, said in a note.

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BoE Chief Economist Huw Pill will speak on Wednesday and fellow member of the Monetary Policy Committee (MPC) Catherine L Mann will speak Thursday, with traders likely to be listening closely for possible hints about future increases.

Brexit-related risks in relation to a possible partial suspension of the Northern Ireland protocol are also a focus for traders.

Germany and Ireland on Sunday told Britain there was no legal or political justification for Prime Minister Boris Johnson’s plan to override parts of the Brexit deal governing trade with Northern Ireland.

“Markets will probably wait for what the reaction from the EU will be, but it’s more a story of global risk sentiment. Sterling is a pro-cyclical currency, cable (the pound) should move mostly in line with the dollar,” said Francesco Pesole, FX strategist at ING.

(Reporting by Lucy Raitano Editing by David Goodman )

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