Bank of England interest rate hike speculation rocks the pound

Trade in the pound has been highly changeable over the past couple of weeks as Bank of England (BoE) interest rate speculation has proven to be a double-edged sword for the currency.

During this time GBP/EUR traded between 1.15 and 1.11, while EUR/GBP slipped from 0.86 to 0.85, and at the same time, GBP/USD fluctuated between 1.25 and 1.28, while EUR/USD climbed from 1.08 to 1.09.

What’s been happening?
The pound traded in a wide range over the past fortnight. This volatility was linked to BoE rate hike expectations. GBP initially fell amid fears the BoE would tighten the UK into a recession before bets on a 50bps hike in August revived Sterling sentiment.

In contrast, the US dollar closed June on a high on the back of hawkish comments from Federal Reserve Chair Jerome Powell, before tumbling in response to some disappointing US payroll figures.

Movement in the euro somewhat mirrored that of the US dollar. EUR exchange rates initially firmed on the back of comments from European Central Bank President Christine Lagarde, before some lacklustre Eurozone data undermined the single currency in the first week of July.

What do you need to look out for?
The next couple of weeks will see the publication of the UK’s latest jobs report and consumer price index. Their release could infuse further volatility into the pound if they influence BoE rate expectations.

The US will publish its own CPI data later this week. Could another pullback in inflation weaken Fed rate hike bets and pull USD lower? Meanwhile, in the absence of any notable EUR data, could movement in the euro be influenced primarily by Ukraine developments?

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