Pound Retreats from Early Gains as Dollar Strengthens

The Pound Sterling (GBP) experienced a mixed day on Thursday, gaining early in the session before retracing its gains as the US dollar strengthened following hotter-than-expected annual producer-price inflation and the European Central Bank's rate hike.

Despite surging oil prices and escalating Middle East tensions, investors are increasingly pricing in further Bank of England (BoE) tightening. Sterling rose to a high not seen since August 29, with some expecting at least two BoE rate hikes by March next year.

The European Central Bank raised all three benchmark rates by 25 basis points on Thursday, taking the deposit rate to 2.50%. The ECB also increased its inflation forecasts due to the prolonged energy shock from the Middle East conflict.

ING FX strategist Francesco Pesole noted that the US Treasury's announcement of a $6 billion long-term bond buyback could help the dollar respond more efficiently to external drivers such as higher oil prices and weaker equities.