The British pound was heading for a second straight monthly gain and fourth positive month in five in July as stubborn inflation readings and robust growth data reinforced expectations that the Bank of England has more to do to bring inflation lower.
Britain’s central bank is likely to raise its key interest rate for the 14th time in the current tightening cycle on Thursday, but traders and economists are split on the size of the hike.
Money market traders assign around a two-in-three chance of a quarter-point move and one-in-three that the Bank of England opts for a 50 basis point rate rise, while markets still price around 90 basis points of tightening by March next year.
“If we get the 25 basis point increase, the pound could weaken,” said Kirstine Kundby-Nielsen, analyst at Danske Bank.
The pound was last little changed against the dollar at $1.2856, while the euro last bought 85.85 pence.
In contrast to the BoE, the Federal Reserve and European Central Bank have both laid the groundwork for a pause in their respective tightening cycles at their September meetings as inflation cools.
“The market is priced aggressively for further rate hikes from the Bank of England and if that gets dialled down, this will weaken the pound,” Danske Bank’s Kundby-Nielsen said.
“But significant further increases could hurt the economy even more. It’s a double-edged sword and I don’t really see a best case scenario for the pound,” Kundby-Nielsen added.
Meanwhile, data on Monday showed UK lenders approved their highest number of mortgages since October 2022 in June, although at 54,700, approvals are well below the pre-pandemic average of 66,000, according to Capital Economics.
“Our view that the Bank will keep rates high until the second half of next year means mortgage rates are likely to plateau rather than fall,” Capital Economics UK economist Ashley Webb said.
“That suggests mortgage lending and housing activity will remain weak over the coming months.”
Traders meanwhile cut their bets on a continuing rally in the pound by the most since mid-June, data from the U.S. Commodity Futures Trading Commission showed on Friday.
