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Sterling hits 4-month low versus euro ahead of expected BoE, ECB hikes

Published by Uma Rajagopal

Posted on February 2, 2023

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LONDON (Reuters) – The British pound slipped on Thursday to its lowest level against the euro since September as investors awaited the Bank of England and European Central Bank policy decisions later in the day.

The BoE is expected to raise its main interest rate by 50 basis points, its 10th consecutive rate rise, as it keeps up its fight against rampant inflation. There is an outside chance of a smaller quarter-point rate rise.

A 50-basis-point move, which is largely priced in by money markets, would take the Bank Rate to 4%, its highest since 2008.

The announcement is scheduled for 1200 GMT.

Focus will be on the vote split among policymakers after a three-way split in December when two rate-setters preferred to maintain the Bank Rate at its level then, one member favoured a larger 75-basis-point rise and six voted for a half-point hike.

“A potential downshift to 25bp is possible, which would weigh on GBP given 45bp is priced in the rates market,” HSBC analysts said in a research note.

“Even if the BoE hikes 50bp, it is unlikely to give such a hawkish message as the ECB.”

The ECB is widely expected to raise its interest rates by 50 basis points when it announces its policy decision at 1315 GMT and is likely to signal further rate hikes at future meetings.

By 0952 GMT, the euro was up 0.4% against the pound to 89.18 pence, its strongest level against sterling since September last year.

The pound was down 0.3% against the dollar at $1.2337. It hit a seven-month high of $1.24475 last week.

On Wednesday, the Federal Reserve raised its main interest rate by 25 basis points, a downshift from the 50-basis-point hike at the last meeting. Fed Chair Jerome Powell said “a couple more” rate increases likely lay in store.

The BoE will also be updating its projections for growth and inflation, with most economists now expecting a shallower downturn than previously predicted.

“We expect the updated MPC macro projections to show upgrades to growth and likely lower near-term inflation,” UBS economists said in a note.

(Reporting by Samuel Indyk and Susan Mathew; Editing by Emelia Sithole-Matarise)