Pound Climbs as Oil Prices Plummet and Rate Hike Bets Are Scaled Back
The British pound climbed higher against the US dollar on Monday as oil prices plummeted and investors scaled back bets of further interest rate hikes by the Bank of England. Brent crude prices dropped 9% to $87.84 a barrel, easing concerns about energy-driven inflation. This led to a decline in two-year gilt yields, which fell 6 basis points to 4.362%, a steeper drop than seen in equivalent US and German government bonds.
The Bank of England is expected to leave interest rates unchanged at 3.75% on Thursday after June's inflation reading came in below the central bank's forecasts. However, economists remain divided over the longer-term outlook, with higher energy prices potentially complicating the inflation picture. Money markets price in roughly an even chance of a September rate hike.
ING FX strategist Francesco Pesole wrote that if inflation remains contained, the BoE will leave rates unchanged for the rest of the year, making a dovish repricing the clearest near-term risk for sterling. Sterling strengthened 0.2% against the euro to 84.55 pence, extending its recovery from a one-year low touched on July 15.