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Sterling close to its 23-month high versus euro, eyes BoE

Fri, 28th Jan 2022 09:12

* Graphic: World FX rates in 2020 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

By Stefano Rebaudo

Jan 28 (Reuters) - Sterling on Friday edged up against the
euro, just off its 23-month high, as investors expect the Bank
of England to raise rates next week and follow a much faster
path of monetary tightening than the European Central Bank in
2022.

Analysts argued that the hawkish BoE stance would boost the
pound, despite the tightening plans from the U.S. Federal
Reserve, providing some defence also against the dollar.

“Key rates that rise by more than 25bp (at next week’s
policy meeting) would help sterling if BoE governor Andrew
Bailey were able to convince the market that the BoE has a
plan,” Commerzbank analysts said, describing last year’s BoE
announcements as “fickle.”

The BoE’s decisions on rates wrong-footed markets in
November and December 2021.

Sterling was up 0.1% versus the euro at 83.20 pence, just
off its 23-month high of 83.065 pence touched on
Jan. 20.

Investors also focused on the BoE’s bond buying programme as
the bank at its August 2021 meeting said the Monetary Policy
Committee intended to begin reducing the stock of purchased
assets once Bank Rate had reached 0.5%.

“We also expect discussions around active QT to gather
momentum over the next few months,” Deutsche Bank analysts said.

“While not our base case at this stage, a slightly more
aggressive wind-down of the Bank's balance sheet should not be
discounted and looks a little more likely,” they added.

The dollar was higher on Friday, heading for its best week
in seven months as markets priced in a year of aggressive hikes
in U.S. interest rates.

The pound was flat against the greenback at $1.3375.

Political risks remained in the background after British
Prime Minister Boris Johnson on Thursday re-committed to
publishing in full an internal report into boozy parties and
social gatherings held at his Downing Street residence during
coronavirus lockdowns.

Britain hopes to secure significant progress in post-Brexit
trade talks with the European Union by February and win the
support of pro-British unionists in Northern Ireland opposed to
the current arrangements, Foreign Secretary Liz Truss said.
(Reporting by Stefano Rebaudo
Editing by Mark Heinrich)

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