Pound strengthens as traders assess interest rate prospects

BY Reuters | ECONOMIC | 07/04/22 10:37 AM EDT

By Lucy Raitano

July 4 (Reuters) - The British pound rose against the dollar and euro on Monday, pulling away from two-week lows as risk sentiment improved and traders focused on any signals that the Bank of England could raise interest rates faster than expected.

At 1413 GMT the pound was up 0.31% against the dollar at $1.21330. It was also stronger against the euro, rising 0.17% to 86.050 pence.

As risk sentiment picked up in global FX markets, the pound also rallied against so-called safe-haven currencies, the Swiss franc and Japanese yen.

Sterling last week concluded its steepest six-month drop since 2016, down more than 10% against the dollar this year.

The focus remains on the UK's slowing economy, with the BoE tasked with tackling soaring inflation while avoiding a recession.

The BoE has raised rates five times since December and its next scheduled rate announcement is Aug. 4. Some market players expect a bigger increase of 50 basis points (bps) at the next meeting.

"Any indication that policymakers are erring towards raising rates by 50 basis points at the next MPC meeting in August would be positive for the pound and may trigger a recovery rally from currently suppressed levels," Matthew Ryan, head of market strategy at global financial services company Ebury, said in a note.

BoE Chief Economist Huw Pill will speak on Wednesday and fellow member of the Monetary Policy Committee (MPC) Catherine L Mann will speak Thursday, with traders likely to be listening closely for possible hints about future increases.

Brexit-related risks in relation to a possible partial suspension of the Northern Ireland protocol are also a focus for traders.

Germany and Ireland on Sunday told Britain there was no legal or political justification for Prime Minister Boris Johnson's plan to override parts of the Brexit deal governing trade with Northern Ireland.

"Markets will probably wait for what the reaction from the EU will be, but it's more a story of global risk sentiment. Sterling is a pro-cyclical currency, cable (the pound) should move mostly in line with the dollar," said Francesco Pesole, FX strategist at ING.

(Reporting by Lucy Raitano Editing by David Goodman )

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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