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Tuesday, 22 May 2018

Bank of England rate comments lift sterling to one-week high versus euro


LONDON (Reuters) - Sterling rallied to a one-week high against a broadly firm euro on Tuesday after a top central bank official struck an upbeat note on the outlook for future interest rate increases.

Bank of England policymaker Gertjan Vlieghe told the Treasury Committee in Britain's parliament that policy rates are set to rise 25 to 50 basis points every year over a three-year forecast period, a comment interpreted by currency markets as supportive for the British currency.

“His comments are helping sterling but it is important to remember that everything policymakers say today is conditional on the incoming data and that needs to be kept in mind to correctly assess the policy outlook,” Viraj Patel, an FX strategist at ING Bank in London, said.

Against the dollar, sterling extended gains and rose 0.4 percent to the day’s highs at $1.3492. It climbed 0.2 percent to a one-week high against the euro at 87.60 pence.

Interest rate markets were broadly unchanged by the relatively optimistic comments, with the probability of another quarter point rate hike holding at around 90 percent by the end of the year, the same levels as earlier this week.

Gains were capped before important data on the British economy due out this week, including inflation on Wednesday and the gross domestic product figure on Friday.

These will be scrutinised by investors to gauge whether the BoE might tighten monetary policy as early as August.

Tuesday’s rise in the pound came after concerns over the risks in the post-divorce relationship Britain negotiates with the European Union weighed heavily on the currency last week.

Adding to the uncertainty, lawmakers from Prime Minister Theresa May’s governing Conservative Party is reported to be bracing itself for a snap autumn parliamentary election amid fears that the Brexit deadlock will become insurmountable.

But the biggest reason for sterling’s recent fall has been a drastic shift in expectations of when the BoE will raise rates.

“Until a solution emerges on the Brexit front, a rate hike is the only things that could support sterling temporarily,” Commerzbank strategists said in a note.

“Without it, sterling remains unattractive.”

Reporting by Saikat Chatterjee

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