Sterling rises as Bank of England and the Fed wrest back attention from car-crash politics

Jasper Jolly
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Janet Yellen is expected to raise interest rates on Wednesday (Source: Getty)

Sterling rose in Tuesday trading as the prospects for central bank tightening plans vied for traders’ attention with the ongoing battle within government over the path of Brexit plans.

The pound rose by as much as 0.7 per cent from early morning lows against the US dollar to reach $1.273 at the time of publication.

Against the euro, however, sterling was slightly weaker, gaining around 0.4 per cent over the course of the day after earlier weakness. The euro has been buoyed by signs France’s President Emmanuel Macron will win a massive parliamentary majority.

Read more: Sterling weakens further as softer Brexit doubts grow

British currency markets have been dominated in recent days by the shock General Election result, which saw Prime Minister Theresa May, by contrast, stripped of her parliamentary majority.

May has been forced to rely on the support of Northern Ireland’s Democratic Unionist party (DUP) in a confidence and supply agreement to cling to power. She is meeting DUP leader Arlene Foster today in an attempt to strengthen a relationship which the Conservatives had already pursued before the election result.

However, with both the Bank of England and the US Federal Reserve meeting this week, the prospects for central bank tightening will start to come uppermost in traders’ minds.

The Bank of England will almost certainly continue to look through inflation, rose to its joint-highest rate since 2012 in May. Analysts are not expecting any major move from the Bank in Thursday’s midday announcement, although markets will watch closely for signs the election result has further delayed the already distant prospect of tightening.

Read more: Sterling's weakness means UK becomes net investment creditor

Amit Kara, head of UK macroeconomic forecasting at the National Institute of Economic and Social Research (Niesr), said: “Although inflation has surprised the Bank of England on the upside, we expect the MPC to look through this temporary spike in inflation and hold monetary policy stable until mid-2019.”

The Federal Reserve faces a quandary of a different nature: inflationary pressures have steadfastly refused to pick up in recent months as the central bank looks to raise rates further.

The Fed is certain to raise its federal funds rate, the interest rate it charges to other banks, tomorrow according to market-implied probabilities calculated by CME Group. The purchases of federal fund futures now imply a 100 per cent chance of a rate hike.

However, market attention will now focus on the prospects for further rate hikes, with debate on whether the Fed will predict a third upwards movement this year.

Read more: Investors bet on Federal Reserve to raise interest rates on Wednesday

Hussein Sayed, FXTM chief market strategist, said: “The tight labour market is still not accelerating wage growth, meaning the Fed will not be forced to tighten aggressively, and long-run US yields are likely to remain under pressure.

“Consumer prices and retail sales are due to be released tomorrow before the announcement, and although it won’t affect the decision, these figures will impact the timing of the following rate hikes.”

Bond yields were mostly flat across Europe’s main markets with investors holding for the big central bank announcements.

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