LONDON, United Kingdom: The British pound rate outlook strengthened Wednesday as sterling touched USD 1.3545, its highest level against the dollar since August 28.
Money markets price in at least two Bank of England rate increases by next March, with a 40% probability of a third. Sterling has gained about 0.5% against the U.S. dollar this year. By comparison, the euro is down about 1%, and the Japanese yen has fallen roughly 2%.
Higher energy prices have increased expectations that the Bank of England may need to tighten policy. Crude oil has risen about 40% since the Iran conflict began in late February, while European natural gas prices have roughly tripled.
Bank of England Governor Andrew Bailey, however, pushed back Tuesday against suggestions that higher rates were inevitable. Bailey told lawmakers there was no predetermined or unconditional path for future rate increases.
Read: US Gas Prices Hit Record Labour Day High Above $4 a Gallon
ING strategists said every USD 10 increase in Brent crude since the Iran war began had added about 15 basis points to U.K. two-year rate expectations.
ING strategist Michiel Tukker said market expectations for British rates may be excessive, while uncertainty over oil prices and next month’s Autumn Budget continues to complicate sterling’s outlook.
