In interviews released over the weekend, the Bank of England reported that the level of inflation in the UK was worrying and encouraged citizens to anticipate an early increase in interest rates. With this report, the pound strengthened in relation to the euro and the US dollar.
The Bank of England Announces an Early Increase in Inflation Levels
Britons could expect “much sooner” interest rate hikes, according to Michael Saunders, a policymaker at the BOE. He told the Telegraph newspaper on Saturday that investors were correct to predict that borrowing costs would increase because consumer prices now have around 4% inflation.
In an interview, Andrew Bailey, who is the BOE governor, said that the BOE initially had a 2.0% inflation target and that it was worrying to see that the inflation level is now surpassing that target. He added that the right measures needed to be taken and carefully so that this doesn’t become permanent.
November contract pricing, as shown by futures of interest rates traded on the CME, had as much as a 20% chance of a rate rise by November. This is an increase from the 12% chance as of last week. Meanwhile, the futures for December have a 45% pricing probability that the rate will increase.
According to Simon Harvey, senior Forex analyst at Monex Europe, traders who trade the pound sterling used early Monday morning to price in the weekend commentary from BoE officials.
He added that they regard the gains of the pound as having a limit because of the worries about the inherent nature of the UK’s economic activities.
The Impact of the News on the Pound Sterling
Early in the week, the pound increased by 0.1% against the dollar, trading around $1.3635, after reaching a 2-week high. To the euro, pounds gained 0.2% to climb to 84.79, close to a 2month high.
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