LONDON, January 4, Reuters -- The pound reached two-year highs against the euro on Tuesday and slipped only modestly against a strengthening dollar, supported by the rise in gilt yields on a growing expectation that the Bank of England will raise interest rates next month.
The two-year and 10 year British government borrowing costs went to two-month highs, up six basis points on the day after Prime Minister Boris Johnson said new measures were not needed to fight the Omicron coronaviruses variant and Monday's rise in U.S. yields.
There is a 25 bps U.S. rate rise by May, and two more by the end of 2022, while in the euro zone, there is no rate increase this year, with economic activity still weak and a number of countries under COVID-linked curbs.
The possibility of European rate hikes is very low and the possibility of hikes in the UK is pretty good, said Colin Asher, Mizuho senior economist who expects the BoE to raise rates twice this year and continue to do so in 2023.
The pound was close to six-week highs of $1.355 hit on December 31st, the highest since February 2020, and the latest revised PMI figures show manufacturing growth in December more quickly than earlier thought, and by 0930 GMT, the pound dropped 0.2% against the dollar at 1.35, which was close to six weeks highs of $1.355 hit on December 31, the highest since February 2020. British economic activity has generally been firm, and the latest revised PMI figures showed manufacturing growing in December more quickly than earlier thought.
Inflation concerns were kept alive by the fact that new orders and output increased faster than in November, while prices charged by factories rose at their fastest pace on record, keeping jobs growth slowed.
British real or inflation-linked yields have also gone up over 100 bps on the 10 year segment in the past month while German and U.S. equivalents have gone up 20 bps or less.