Geopolitical tensions may hinder Sterling’s gains

GBP

Sterling rallied to fresh highs against both the euro and dollar on Wednesday.

It is widely expected that the Bank of England will continue with its normalisation of monetary policy on Thursday. Markets also await the central bank to raise the interest rate by 0.25 bps to 0.5%, the first back to back rate hike since 2004.

Whilst the bulk of Sterling’s recent appreciation can be attributed to markets pricing in an interest rate hike during Thursday’s meeting, further gains may be capped if the BoE delivers a decision which is more or less in line with market expectations. Should the bank signal that further hikes are necessary, this may be enough to force the pound to fresh highs surpassing current resistance levels.

There are still some potential headwinds on the horizon for Sterling. In particular, political uncertainty owed to Prime Minister Boris Johnson facing pressure to resign and geopolitical issues due to tensions between Russia and Ukraine worsening.

USD

The dollar fell on Wednesday, as a combination of poor data and dovish comments from Federal Reserve officials reversed some of the currency’s recent gains.

Speaking on Monday, Kansas City Fed President Esther George stated that aggressive action to reduce bond purchases may reduce the need for successive rate hikes. Whilst Atlanta Fed President, Raphael Boston, downplayed recent Fed hawks declaring that he only expects three hikes this year compared to Bank of America’s projection of seven.

Another contributing factor to dollar weakness yesterday was the disappointing release of ADP employment figures. Markets had been anticipating a positive number showing 207,000 new hires for January. Instead, employment fell by 301,000.

Key announcements

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