Sterling steadied against the euro after a sharp slide triggered by the European Central Bank‘s more hawkish tone. This overshadowed the Bank of England’s rate rise. The euro rose versus sterling after the ECB surprised markets by suggesting for the first time that an interest rate rise this year was a possibility.
Sterling flattened against the euro to 84.59 pence. This is after touching its lowest level against the single currency. It lost some steam against the dollar, flattening at $1.3528. And that is after hitting its lowest level versus the greenback. While a quarter-point hike by the BoE was largely expected, a split vote came. Four of the nine Monetary Policy Committee members wanted a 50 basis points move. The BoE also warned inflation could top 7%.
Jane Foley, head of FX strategy at Rabobank in London stated that last week both the BoE and the ECB were more hawkish than expected. This is though the ECB was the far greater surprise. As the ECB provides some more details on its future direction, the pound could recover a little versus the euro. But the dollar’s safe-haven status may keep a lid on GBP/USD. ECB President Christine Lagarde told the European Union Parliament that current price pressures will likely subside before becoming entrenched. And, that will enable the central bank to deliver on its 2% inflation target over the medium term.
Traders are also keeping an eye on political developments in Britain. Prime Minister Boris Johnson has been under pressure over parties held during this lockdown. Simon Harvey, head of FX analysis for Monex Europe, said that he expected political risks to have a limited impact on the pound for now as policy is set to remain on its preset course even if Boris Johnson is ousted.