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Pound Edges Back Towards 2-wk High, Investors Focus on Rates

LONDON, July 7 (Reuters) - The British pound on Friday edged back towards a two-week high reached against the U.S. dollar the day before, supported by interest rate differentials as Britain looks set to outpace the U.S. and Europe on rate rises this year.

The Federal Reserve paused its tightening cycle in June and although it looks likely to resume rate increases this month, it appears closer to the point where it will take stock of past rate increases as inflation shows signs of slowing.

In contrast, the Bank of England this month raised the bank rate by half a percentage point and markets are pricing another 150 basis points of tightening by the middle of next year as inflation remains sticky.

Consumer price inflation stood at 8.7% in May, unchanged from April and 0.3 percentage points higher than the BoE expected in their May monetary policy report.

Stephen Gallo, global FX strategist at BMO Capital Markets, said the pound was "well supported" against the dollar and euro as the market narrowly focuses on rate differentials as opposed to why UK rates are expected to rise further.

"When the cure is pricing in 6% plus handle for Bank Rate it's kind of hard to see FX investors with very small investment horizons shorting sterling aggressively," Gallo said.

"The longer GBP and UK yields stay supported in the short-run because of sticky inflation and a hawkish BoE, most likely the deeper correction lower in GBP later on," Gallo added.

The pound was last up 0.1% against the dollar at $1.2748, having reached its highest since June 22 on Thursday of $1.2780.

Against the euro, the pound rose 0.1%, with the single currency buying 85.35 pence.

Stickier inflation has prompted markets to bet that the BoE will need to tighten policy aggressively to rein in inflation, although analysts expect price pressures to ease later in 2023.

"The inflation picture should improve later this year, which means some pricing out of BoE rate expectations can come hitting the pound down the road," said Francesco Pesole, FX Strategist at ING.

"For now, it remains hard to see a sustained GBP downtrend."

Reporting by Samuel Indyk; editing by David Evans

Source: Reuters


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