Article Highlights

  • BoE expected to raise rates 25 bps on Thursday
  • Sterling trading two cents higher than 10-month lows
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The British pound edged higher on Tuesday as investors prepared for the Bank of England’s monetary policy meeting later this week at which markets are now pricing in a near-90 percent chance of a 25 basis points rate rise.

Sterling has found its feet and traded higher in recent sessions, moving away from the 10-month low it touched earlier in July on growing worries that Britain was headed for a cliff-edge departure from the European Union.

Investors believe that with the BoE seemingly comfortable with the market pricing in a rate rise on Thursday, that is as good enough a signal as they will get that only the second rate hike since the financial crisis is a near-certainty.

But investors will be looking for comments from the Monetary Policy Committee (MPC) as to whether this is the start of a series of tightening moves or, as most reckon, a one-off hike before Britain leaves the EU next March.

“I don’t understand why it is looking to raise rates … There has been much less healing in the UK household balance sheet than there has been in the U.S. Now we’re reaching this crunch point on Brexit as well,” said David Riley, chief investment strategist at BlueBay Asset Management.

“I think they are going to hike rates on Thursday because they have set it up and Carney doesn’t like the “unreliable boyfriend” (tag). I think they will do it but it will be one and done,” Riley said, referring to accusations that BoE Governor Mark Carney’s guidance on the path for rates has been repeatedly knocked off course by economic surprises.

Against the dollar the pound rose 0.2 percent to $1.3162 .

Sterling traded flat versus the euro at 89.115 pence per euro.

Recent economic data in Britain has pointed to an economy that is recovering from a slowdown in the first-quarter but is still struggling, with wage growth weaker than expected given low levels of unemployment and limited domestic inflationary pressures.

“It would be a major surprise if the BoE did not raise rates. The tone and tenor of any statement will be more important, the debate has moved on to whether they can do another hike and if so, when,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

“The debate is still open on what’s happening on the unemployment side and weakness of GDP versus the impact of oil prices and sterling moves on headline inflation.”