Britain’s pound strengthened against the dollar on Monday, as traders geared up for a Bank of England policy meeting later in the week that they expect will produce the first increase in interest rates in more than a decade.
Most economists polled by Reuters expect the central bank to raise rates on Nov. 2, lifting the official cost of borrowing to 0.5 percent after last year’s 25-basis-point cut in the aftermath of the vote for Brexit.
While that hike is largely priced in, traders will be watching closely for what members of the Bank’s Monetary Policy Committee (MPC) say about future interest rate rises, and they will also be looking carefully at updated forecasts for growth and inflation.
“The BoE is fully expected to hike…on Thursday,” said RBC Capital Markets currency strategist Adam Cole.
“The real question is where rates go after that. Although we don’t think the Bank will increase rates again in 2018, that is not the message we expect the MPC to deliver, and the near-term risk for sterling is to the upside.”
Sterling posted its best week in six against a euro hit by worries over political uncertainty in Spain last week, and traded close to a one-month high on Monday, flat at 88.41 pence per euro.
It was up a third of a percent at $1.3163.
Speculators added to their bets against the pound in the week up to last Tuesday, data showed on Friday, with net positioning slipping into negative territory for the first time since mid-September, on uncertainty over Britain’s exit from the European Union and the hit that would have on the economy.
UBS currency strategists wrote in a note to clients that sterling was “torn between two forces”.
“We see tighter Bank of England monetary policy on the one hand, counterbalanced by uncertainty surrounding Brexit talks on the other,” they wrote.
“The former should lead to higher UK yields, underpinning sterling, while the latter may weaken the pound, dragging (it) down to $1.20 should talks collapse,” they continued, adding that they expected sterling to strengthen to around $1.36 on the back of tighter BoE policy.