Sterling slipped against the dollar and the euro on Thursday (Feb 2) as the Bank of England (BOE) raised interest rates by 50 basis points (bps) but hinted its tightening cycle was nearing an end.

Thursday’s central bank meetings came a day after the US Federal Reserve (Fed) slowed the pace of its rate rises to 25 bps, saying it had turned a corner in the fight against inflation. This was its first explicit acknowledgment that price increases are slowing.

That underpinned market expectations that the end of the US central bank’s rate-rise campaign is near and cuts could follow.

The pound fell to a session low of US$1.2276, after the BOE raised rates to 4 per cent before recovering slightly to stand 0.63 per cent lower on the day. It had rallied on Wednesday, in line with other major currencies, as markets heard a dovish message from the Fed.

The UK central bank’s Monetary Police Committee (MPC) said further interest-rate hikes would hinge on evidence of more persistent price pressures appearing, representing a signal to investors that its sharp run of rate hikes might be coming to an end.

The euro dipped against the dollar after the European Central Bank (ECB) hiked interest rates by a widely expected 50 basis points and offered no new hawkish surprises.

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The ECB penciled in at least one more hike of the same magnitude next month and said it will then evaluate the subsequent path of its monetary policy. The euro fell 0.64% on the day to US$1.0920.

The euro rose 0.7 per cent to 89.4 pence, its highest level since September and the turmoil that followed then British Prime Minister Liz Truss’ economic policy.

“There seems to be a preference to sell sterling, especially against the euro,” said Piotr Matys, senior FX analyst at Intouch Capital Markets. “Investors adopted such a preference back in December when the BOE delivered a dovish 50 bps hike, and on the same day (European Central Bank) President Lagarde sounded significantly more hawkish, and we may witness a similar situation today.”

He added that the outlook for the UK economy was still quite challenging, compared with that of the eurozone and United States.

“That is why the British pound, after a knee-jerk reaction, resumed its decline.”

“A 50 bps hike is widely expected, as is a hawkish message that will support market pricing of a further 75 to 100 bps of tightening into the summer,” said Chris Turner, global head of markets at ING, in a note.

“A sharp narrowing in rate differentials stands to become a bigger driver of euro/US dollar this year and should carry it to the US$1.15 area in the second quarter.”

He added that the derivatives market showed the smallest premium in dollar rates over euro equivalents since late 2021.

The Australian dollar hit a new eight-month high of US$0.7158 in early Asia trade, having gained 1.2 per cent on Wednesday, while the Swiss franc firmed to its strongest since late 2021.

Against a basket of currencies, the US dollar index fell more than 1 per cent to a fresh nine-month low of 100.8 on Wednesday, and traded just above that on Thursday.

The Singapore dollar was up by a more than five-year peak, after Powell’s comments on disinflation lifted risk sentiment. Singapore’s dollar appreciated 0.2 per cent to US$1.3038, its highest since January 2018, and has been on an upward trajectory this year due to rising expectations of easing inflation and less aggressive monetary tightening.

“The Singapore dollar NEER (nominal effective exchange rate) has retreated from the top towards the midpoint of (the Monetary Authority of Singapore’s) policy band, a sign that policy focus may start to shift from inflation towards economic slowdown,” DBS foreign exchange strategist Philip Wee said.

Friday’s US nonfarm payrolls report will be the next test of the Fed’s fight against inflation, though official statistics on Wednesday showed that job openings had unexpectedly risen in December, pointing to a still-tight labour market. REUTERS