After hitting 3-week lows on Tuesday, Sterling showed signs of recovery yesterday as the currency “steadied… as some calm in stocks led traders to buying back into hard-hit currencies”. Sterling has had a tough couple of weeks with the prospect of tighter interest rates encouraging “investors to dump currencies deemed riskier”. The Bank of England meet next Thursday, and markets are expecting “tightening for a second time since the pandemic hit, raising rates 0.25% to 0.5% as policymakers try to rein in inflation rates currently running at more than double the BoE's target levels”.
Posing as a major downside risk to the Pound is the “renewed political uncertainty” around British Prime Minister Boris Johnson. In Prime Ministers Questions yesterday Johnson faced harsh calls to resign but reiterated he will “fight on” as Prime Minister as MPs await the final findings of civil servant Sue Gray’s inquiry. According to Sky News, Ms Gray is first running the report “past lawyers, HR and the Metropolitan Police to make sure the document can be published in full”.
Across the pond, the Federal Reserve had their first policy meeting of 2022 yesterday. The US central bank kept rates unchanged this month but said that a rate hike “will soon be appropriate”. At this point, investors are expecting a rate hike in March in an attempt to fight the fastest rise in US inflation in almost 40 years. Fed Chair Jerome Powell said that the FOMC were “of a mind” to raise rates in March and are confident that can do so without hindering the economic recovery. This news was positive for the Dollar.
GBPUSD was able to make modest gains yesterday as Cable edged back over the 1.35 handle. The pair opened at 1.3495 and closed at 1.3514.
GBPEUR also made gains on Wednesday – opening at 1.1956 and closing at 1.1980.
EURUSD traded in a tight range on Wednesday in the lead up to the Fed interest rate decision. The pair opened at 1.1287 and closed at 1.1281.