The British pound strengthened to a two-week high against the euro as it continued to retrace losses which followed what investors perceived as a “dovish” interest rate hike by the Bank of England on March 17.
Focus has turned to UK inflation data and British finance minister Rishi Sunak’s Spring Statement, both scheduled on Wednesday.
Commerzbank said the update on UK inflation could move the pound “considerably” if rising prices once again exceed expectations.
“If this was to be the case again tomorrow the BoE rate hike expectations could be fuelled again, allowing sterling to recover somewhat further against EUR,” Commerzbank FX analyst You-Na Park-Heger said.
Annual headline CPI is seen climbing to 5.9%, according to a Reuters poll, which would mark the highest level in 30 years.
Against the euro, sterling rose 0.6% to 83.11 pence, its strongest level against the single currency since March 8.
The pound rose 0.7% against the U.S. dollar to the highest since March 4 at $1.32735.
Traders are also preparing for Sunak’s Spring Statement but Simon Harvey, head of FX analysis at Monex Europe, is wary about placing today’s move in the pound on expectations for the budget update.
“I’d be cautious to extrapolate too much from today’s price action ahead of the budget update,” Harvey said.
“Markets are readjusting to higher rates and a flatter curve in the U.S.”
On Monday, Federal Reserve chair Jerome Powell said the central bank would raise rates more aggressively if needed, pushing yields in the U.S. to multi-year highs. read more
Meanwhile, markets are again pricing in a Bank of England interest rate above 2.0% at the end of the year , despite what some considered as a “dovish hike” last week from the central bank.