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Pound Rallies Against US Dollar On Potential BoE Hike

On Tuesday, the British Pound strengthened against a US dollar that appeared to be struggling broadly but declined against a stronger euro. This was because domestic politics was still very much in play and data showed that the demand for staff had not yet taken a hit in Britain, despite the cost-of-living crisis that seems to be happening.

Economic data

According to the latest figures, the unemployment rate in Britain was held steady at 3.8% in the three months leading to May. Meanwhile, there was the highest rise in the recorded number of people at work, which had last been seen halfway through the previous year.

This week, the labor market data turned out to be strong once again and market analysts said that this would give the Bank of England (BoE) the room to hike interest rates more aggressively, as they will not have to worry about damaging the levels of employment.

The British currency recorded a 0.7% gain against the US dollar to reach $1.20340, but it had declined against the euro by 0.3% to trade at 85.14 pence.

Euro decline

Sterling declined against the euro because a source-based report was providing the common currency with support. According to the report, the European Central Bank would have a discussion in Thursday’s policy meeting about whether to hike the interest rate by 25 basis points, or by 50 basis points.

Pound traders also continued to stay focused on the political situation in the country, as the competition to find a replacement for British Prime Minister Boris Johnson seems to be narrowing. The fourth round of voting saw Rishi Sunak, the former finance minister, emerge as the winner.

However, junior trade minister Penny Mordaunt and Liz Truss, the Foreign Secretary, were catching up quickly. There were mixed views on how the outlook for Sterling would change because of the contest.

Change in policy

The candidates that have been chosen by the Conservative party all have different approaches where fiscal policy is concerned. This means that whoever is chosen as the next premier of Britain could have an impact on the future fiscal policy path. But, it should be noted that a top official of the British central bank pushed back against this idea.

Market analysts said that Sunak’s win would mean that the status quo was unlikely to change, while Mordaunt’s win would actually bring a change as the fiscal policy would become tighter. This could help the economy is growing more sustainably.

The Bank of England (BoE) has already hiked up interest rates five times in the country, as it is battling surging inflation like the rest of the world, along with a cost-of-living crisis. Its goal is to prevent inflation from being embedded into the UK’s economy. The markets have shown a preference for Sunak, as he is regarded as the most economically competent and astute candidate to run the country. Analysts said that cutting taxes could attract voters, but markets tend to be more tepid and could shun the British pound.

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