Exchange Rates – What’s Going On?
The pound weakened broadly this morning, pulling back from a 23-month high versus the euro touched in the previous session as weakness in Wall Street prompted investors to take profits after a rally this week.
Against a broadly sturdy U.S. dollar, the pound weakened 0.25% at $1.3585, its lowest levels in more than a week. Versus the euro, the pound weakened 0.5% at 83.58 pence, not far from a February 2020 high of 83.07 pence tested on Thursday.
Traders have pushed the pound higher on expectations the Bank of England will raise interest rates as early as next month to combat soaring inflation.
Money markets currently price in more than 100 basis points (bps) in interest rate rises in 2022 and an 87% chance of a 25 bps increase in February, after data showed on Wednesday that UK inflation rose faster than expected to its highest in nearly 30 years in December.
Domestic politics has not hurt the pound yet even as Prime Minister Boris Johnson has fought to save his premiership amid a deepening revolt inside his party over a series of lockdown parties in Downing Street.
The pound has not paid much heed to recent headlines regarding the position and character of PM Johnson as this can be explained by the fact that no general election is scheduled until 2024 in the UK and whoever is party leader will inherit a large parliamentary majority.
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