The pound slipped slightly in early trading on Monday, but was still close to its strongest versus the euro since February 2020, as investors focused on the possible pace of monetary policy tightening after the Bank of England meeting last week.
In recent weeks, sterling has outperformed as COVID-19 cases have fallen and high vaccination rates have allowed the British government to lift most social-distancing rules.
The pound has strengthened versus the euro for the last three weeks in a row, and on Friday reached 84.7 pence per euro, its strongest since February 2020.
At 0801 GMT on Monday, the pound was down 0.1% versus the dollar, at $1.38645. The dollar had hit a four-month high against the euro during Asian trading, extending Friday’s gains after a strong U.S. jobs report prompted investors to bring forward their bets on the Federal Reserve tapering its pandemic-era stimulus.
Versus the euro, it was down by less than 0.1%, at 84.76 pence per euro.
On Thursday, the Bank of England’s monetary policy committee voted 7-1 to maintain the pace of its government bond-buying, even though it expects inflation to jump to 4.0% around the end of the year. But it also said that “some modest tightening” of monetary policy over its three-year forecast period was likely to be necessary.
“The Bank of England’s updated outlook and exit guidance essentially aligned with the market’s view that the time for liftoff has been pulled forward, but the likely glide path will be relatively shallow,” wrote Goldman Sachs FX strategists in a client note.
“We are upgrading our 3m and 6m EUR/GBP forecasts to 0.85; we expect the currency to be particularly sensitive to incoming data on inflation and the labor market as the furlough scheme expires.”
Speculators cut their net short position on the pound in the week to Aug. 3, according to weekly CFTC positioning data, leaving the market’s overall speculative position close to neutral.
Elsewhere, British business minister Kwasi Kwarteng said that finance minister Rishi Sunak was doing a fantastic job after a report in the Sunday Times that Prime Minister Boris Johnson could demote him.
“Sunak is seen as one of the rising stars in the Tory party and a safe pair of hands at the Treasury, such that any demotion could briefly hit GBP,” wrote ING FX strategists.
“Yet these are quiet summer markets and FX traders will likely focus their attention on what any fresh inputs mean to the newly-minted hawkish policy from the Bank of England.”
The UK’s preliminary GDP reading for the second quarter of the year is due on Thursday.
– Reuters