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RationalFX: Bank of England looking to raise interest rates

RationalFX: Sterling hits a two week high on Thursday against the euro, building on the previous gains throughout the week.

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GBP

After a quiet day for market data, expectations that the Bank of England will raise interest rates as early as next month jumped after Governor Bailey confirmed the BoE would have to act to curb rising inflation.

The yield, or interest rate, on the UK’s two-year government bonds jumped to its highest level since May 2019. Yields rise when bond prices fall, which traders have been anticipating for some time now. Rising yields suggest investors are pricing in higher interest rates, from their current record low, to curb inflation. By Monday afternoon, the money markets were pricing in an 85% chance of a rate rise from 0.1% to 0.25% at the Bank’s next monetary policy meeting in early November. Traders see borrowing costs also rising again next year, to 0.5% by February and to 1% by August, according to the latest pricing.

Sterling remained supported against the euro and briefly touched a twenty month high. However after the strong start to the day, the pound came under pressure later in the session. Concerns over rising Covid cases unsettled the market, with the number of cases jumping to a three month high with 49,156 new cases recorded. This was the highest number since July 17th. Sterling’s next major data release will be Wednesday CPI inflation release. If we see a high reading above the BoE target we could contemplate another rise from the pound.

USD

The dollar came under pressure on Monday as US factory production fell to its lowest number in seven months. This saw USD erase gains acquired from expectations that the Federal Reserve were looking to raise interest rates sooner.

US manufacturing output was hurt by the ongoing supply chain issues which are hampering economic growth. US factory output contracted by -1.3% month on month, short of the 0.2% growth forecast.

Key announcements

13.05 – Bank of England Governor Bailey speaks

18.15 – FOMC member Bowman speaks

Source : ETFWorld.co.uk

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