LONDON, January 11, Reuters -- On Tuesday, the pound rose to its highest level against a weakening dollar in almost 10 weeks, supported by expectations that the Bank of England will raise interest rates further.
The pound was 0.26% compared to the dollar to $1.3620, its highest since Nov. 4, when it fell 1.5% on the day after the BoE surprised the market by keeping interest rates unchanged.
After touching its highest point against the euro since February 2020, the pound was up 0.1% against the euro, at 83.36 pence.
After a surprise hike in December, investors have been expecting the BoE to raise interest rates by 15 basis points to 0.25%, as early as next month.
You-Na Park-Heger, FX analyst at Commerzbank, said sterling has gained some support from signs of weakness in the U.S. dollar, but she said that the prospect of interest rate hikes by the BoE is helping sterling, but she added that it is likely to be priced in already so that the GBP rally could start to run out of steam. Despite rising bets this month that the Federal Reserve will raise interest rates sooner than anticipated, it was trading well below the 16 month highs it touched in November.
The market is already holding long USD positions and this is making it hard for the dollar to react to speculation about Fed policy tightening. Foley said that this may allow cable freedom to go up in the coming weeks.
She expects the market to unwind some of the expectations for BoE hikes as pressure on real incomes in the UK will become more obvious as the winter progresses, she said.