Sterling reached high as factory data stimulates rate increase expectations

British pound

On Wednesday, sterling stabilized versus the euro after hitting its highest at a 4-½ month high, as significant UK factory data reinforced expectations of an inevitable Bank of England interest rate increase.

With a rate increase decision on Thursday primarily priced in, investors will be closely observing the degree of unity among BoE rate-setters as they measure the possibility of further raise.

On 1230 GMT, Thursday, the Bank of England Governor Mark Carney is assumed to disclose the first hike in UK borrowing costs in over a decade after the Bank’s quarterly inflation update.

Furthermore, investors will be monitoring the results of a monthly survey of the British construction sector, forecasted on Thursday at 0930 GMT, for additional indications about the health of the economy and the probability of a longer term tightening cycle.

The survey of British factories on Wednesday displayed stronger than predicted development in the sector last month.

According to MUFG economist Lee Hardman, they are expecting that the Bank will follow through this time and will eventually increase rates. If the bank indeed followed through the expectations, then the market will likely pay particular attention on what kind of signs the BoE send on the outlook for additional rate hikes.

He also added that he assumes that the bank will keep the door open for further tightening on the coming year.

Since mid-June, sterling reached highs hitting 87.33 pence following the factory data release. It has since stabilized at 87.64 pence.

The pound also soared up against the dollar, reaching a two week high of $1.3321, more than its previous data of $1.3289. Since then, it fell by 1631 GMT, trading 0.2 lower.

Indications of progress in Brexit talks have also supplied boost to the sterling this week, including statements by Michel Barnier, the European Union’s chief Brexit negotiator, who stated on Tuesday that he was prepared to move onto the next stage of talks.

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