Sterling Dips as Oil Rises, Still Set for Weekly Gain on Hawkish BoE

Sterling Falls as Oil Prices Climb, but Weekly Gain Remains on BoE Hawkishness

Market Movements and Economic Influences on the British Pound

By Samuel Indyk

Sterling Performance Amid Oil Price Surge

LONDON, March 20 (Reuters) - The British pound fell on Friday, as oil prices resumed their upward trend, but stayed on course for a weekly rise after the Bank of England raised expectations of rate hikes this year. 

Sterling was last down 0.4% versus the dollar at $1.3376, reversing some of the prior day's 1.3% rise. For the week, the currency is up 1.2%.

Bank of England's Stance and Market Expectations

The BoE on Thursday voted unanimously to keep borrowing costs on hold, and said it was "ready to act" to see off risks emanating from the war in the Middle East. 

Money market traders have moved to aggressively price rate hikes, with investors expecting 80 basis points of tightening this year, implying at least three quarter-point rate hikes. 

Impact of Middle East Conflict on Monetary Policy

MIDDLE EAST CONFLICT TRANSFORMS VIEWS

Prior to the conflict, investors had expected the BoE to lower borrowing costs as early as Thursday's meeting. 

Markets have also dismissed the prospect of rate cuts from the Federal Reserve this year, but in contrast to the BoE, do not expect the U.S. central bank to raise rates.

"The repricing has been quite significant and I think it's fair for them (the BoE) to signal determination to bring inflation back to target, but it seems a bit overdone," said Kirstine Kundby-Nielsen, analyst at Danske Bank.

Oil Prices and Currency Dynamics

OIL PRICES PROVIDE DIRECTION

Oil prices rose again on Friday, providing support for the dollar and weighing on the pound. 

"Oil prices are now back in the driver’s seat," said ING FX strategist Francesco Pesole, "but the hawkish BoE tilt is offering some extra support."

Geopolitical Tensions and Safe-Haven Flows

Israel and Iran continued their attacks, while Axios reported that U.S. President Donald Trump was considering occupying the Iranian export hub of Kharg Island to try to pressure Iran to reopen the Strait of Hormuz.   

The U.S. currency has been the biggest beneficiary of the war in the Middle East, gaining due to its safe-haven characteristics and the U.S. being a net energy exporter. 

Britain's Economic Exposure and Fiscal Position

Britain's economy is less exposed to rising energy costs than some other major European economies, but it remains sensitive to rising prices, and the government has little leeway to provide fiscal support. 

Data on Friday showed the government borrowed more than expected last month, although that was in part due to the timing of debt interest payments. 

Sterling's Performance Against the Euro

Against the euro, the pound has been steady, trading last at 86.34 pence per euro, down about 0.1%. 

(Reporting by Samuel Indyk; editing by Barbara Lewis)