Sterling bounces higher as dollar surge eases

LONDON (Reuters) – The British pound rose on Tuesday, moving away from 21-month lows against the dollar as traders took profits on the recent surge in the U.S. currency ahead of both Federal Reserve and Bank of England monetary policy meetings this week.

The Bank of England meeting, which is expected to result in a 0.25-percentage-point rise in interest rates on Thursday, is the big event of the week for sterling.

In recent weeks the pound has fallen sharply as investors have piled into dollars in expectation that the Federal Reserve will raise rates faster than other central banks and that the U.S. economy will hold up better than others in the face of soaring inflation and slowing economic growth.

The U.S. central bank will meet on Tuesday and Wednesday and is expected to raise interest rates by 50 basis points — the first of a series of aggressive hikes expected by money markets. Rises totalling 270 basis points by February are priced in.

On Tuesday, sterling rose 0.4% to $1.2549, compared with a 21-month low of $1.2412 hit last week.

ING analyst are expecting a 0.25-percentage-point BoE rate rise this week.

“We think that would prompt a bit more dovish repricing across the GBP curve and the pound could moderately weaken after the rate announcement,” they said in a note.

“Such weakness should prove more pronounced against the dollar, which could find some more support from the FOMC meeting, and EUR/GBP upside could still be capped to the 0.8450-0.8500 area for now,” they added.

The pound has held up better against the euro in recent weeks, remaining in a relatively tight trading range.

By 0805 GMT on Tuesday the euro was 0.3% lower versus the British currency at 83.87 pence.

The “BoE have reason not to risk upsetting the consumer too much with drastic hikes, leaving 25bp (basis points) as a compromise,” said Mizuho rates strategists.

(Reporting by Tommy Wilkes; Editing by Bradley Perrett)