Will Bank of England rate hikes boost sterling further?

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Bank of England Rate Hikes May Further Boost Sterling Amid Favourable Market Sentiment

Sterling has recently stabilised near its recent peaks against the dollar and euro, largely due to increased market expectations of potential interest rate hikes by the Bank of England. Investors are closely monitoring the central bank's monetary policy decisions, with markets currently pricing in a significant probability of a rate increase in the near future. This positive sentiment towards the pound is further supported by Britain's approach to managing the pandemic, which has favoured booster vaccinations over stringent lockdown measures, thereby enhancing overall risk sentiment.
Increased Expectations of Monetary Tightening

The British pound has experienced a notable strengthening in recent times, driven by a growing anticipation among investors for further increases in the Bank of England's interest rates. This expectation is a primary factor underpinning sterling's current stability. For instance, financial markets are factoring in an almost 80 per cent likelihood of a 25 basis points rate hike in February, signalling a strong consensus towards tighter monetary policy.
Favourable Risk Sentiment and Economic Outlook

Britain's strategy of prioritising the rollout of booster vaccinations, as opposed to imposing further lockdowns, has positively impacted market sentiment. This approach has been interpreted by investors as a sign of economic resilience, boosting confidence in the UK's economic trajectory. Analysts at Unicredit have indicated that sterling is well-positioned to benefit as long as markets perceive the Bank of England's commitment to aggressive monetary tightening throughout the year.
Market Skepticism Towards Political Instability

Despite domestic political scrutiny, including gatherings at the prime minister's official residence during lockdown periods, market participants appear hesitant to price in significant political instability. Analysts at ING have observed that sterling continues to be the best-performing currency in 2022 thus far, suggesting that market sentiment remains largely focused on economic factors rather than political risks. This resilience in the face of political headwinds further bolsters the potential for sterling's appreciation.
Potential for Further Currency Gains

Looking ahead, some analysts favour a further decline in the EUR/GBP cross rate, with a break below the 0.8300 level being a potential near-term target. A sustained positive risk sentiment is likely to provide additional impetus for the higher-beta sterling to gain more ground. This suggests that under favourable market conditions, the pound could see further appreciation driven by both monetary policy expectations and broader risk appetite.

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Will Bank of England rate hikes boost sterling further?

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