Pound Holds as Oil Prices Surge and ECB Decision Looms—Inflation in Focus
Market Movements and Economic Outlook
By Shashwat Chauhan
Pound Performance and Currency Trends
July 23 (Reuters) - The pound held steady and was set for its first monthly rise against the dollar since April on Thursday, while investors weighed a jump in oil prices stemming from escalating U.S.-Iran hostilities ahead of a European Central Bank rate decision.
Sterling was trading flat at $1.338, on pace for its first monthly gain against the dollar in three months. It held firm at 0.853 against the euro after falling around 0.2% in the session, but remained on track for a near 1% rise in July.
Central Bank Decisions and Oil Price Impact
ECB Rate Decision
The ECB is expected to leave its lending rates unchanged at 1215 GMT, but hold the door wide open to a rate hike in September, as crude oil prices rise.
Oil Price Surge
On Thursday, oil rose 4% to $98 a barrel — the highest in over a month, as supply disruption fears persisted.
Inflation and Economic Risks
Inflation Outlook in the UK
Britain is also prone to risks from higher energy prices, with analysts expecting inflation to pick up again later this year despite data on Wednesday showing domestic inflation cooled by more than expected last month.
Analyst Perspective
"I expect price pressures to continue to increase, particularly over the upcoming summer months, so when we start to see the prints for August and September, inflation will kind of push above 3%," said Modupe Adegbembo, an economist at Jefferies.
Bank of England Policy Expectations
The Bank of England is also widely expected to keep its lending rate steady when it meets next week. Money markets show investors, however, are fully pricing in one quarter-point rate hike by December and an around 87% chance of a second such increase.
Government and Market Reactions
Bond Yields and Fiscal Concerns
Meanwhile, British government bond yields climbed as new finance minister John Healey said he was concerned about the cost of doing business, as well as the cost of living.
Comparative Currency Performance
The pound is one of the better-performing G10 currencies so far this year, having lost 0.8% in value against the dollar, but is some way ahead of laggard currencies like the Japanese yen, which has lost 4.1%, and the Swedish crown, which is down 5.4%.
Analyst Commentary
"Sterling's rally has been driven more by positioning, carry and potentially some M&A flows than by a lasting improvement in UK fundamentals. With UK short-dated rates likely to drift lower and fiscal risks set to return ahead of the autumn, we expect sterling to hand back recent gains," ING analysts said in a note.
(Reporting by Shashwat Chauhan in Bengaluru; Editing by Amanda Cooper and Editing by Sriraj Kalluvila)
