Pound Strengthens, Bolstered by BoE's Hawkish Stance

The pound sterling strengthened by approximately 0.2% against the US dollar to US$1.3233 during Tuesday's trading (Oct 13). The GBP/USD rally followed remarks by Bank of England (BoE) official Megan Greene, who emphasized the need for the central bank to take a more proactive approach in addressing inflationary pressures stemming from rising energy prices.

Greene argued that the BoE should not wait until energy price hikes begin to drive up wages and the prices of goods across the board. She noted that once such secondary effects take hold, the central bank's ability to control inflation becomes more difficult. Her statement signaled that UK monetary policy could remain tight should inflationary pressures intensify again.

Greene also assessed that current UK monetary policy is not yet overly restrictive. This opens the door for the BoE to maintain high interest rates or even implement further tightening if inflation remains above target. Currently, the BoE holds interest rates at 3.75%, making the trajectories of inflation and economic growth crucial factors in determining future policy moves.

Meanwhile, the pound also drew support from a weakening US dollar. The US Dollar Index (DXY) fell to around 102.30, retreating from a year-to-date high of 102.60. This environment allowed the GBP/USD pair to strengthen, despite ongoing challenges facing the UK's economic fundamentals.

Newsmaker observes that the pound's current appreciation is driven largely by a combination of the BoE's hawkish stance and a correction in the US dollar. However, its future direction will be tested by UK GDP data for August, due for release on Thursday. Should the economy contract again, the BoE's scope for raising interest rates could become more limited. Conversely, stronger economic data coupled with high inflation could reinforce expectations of monetary tightening and provide further support for the pound.

Source: Newsmaker.id