The pound rose on Wednesday as expectations for additional BoE rate hikes have increased.
The UK political crisis regarding Downing Street parties during the period that the country was under strict Covid-19 restrictions has capped any meaningful gains for the pound.
The pound’s uptick was not driven by any fundamental news and could be attributed to some repositioning of trades by investors as they wait for the Federal Open Market Committee (FOMC) policy decision.
On Monday, ITV News reported that another party took place during the first lockdown period in the UK, this time a birthday party for the Prime Minister. According to the news, Boris Johnson’s wife, Carrie Johnson, organised a surprise party for him on the afternoon of the 19th of June 2020. The allegation has added more pressure on the government, especially after the multiple reports of lockdown-breaking parties in Downing Street and on Whitehall. The Prime Minister has been accused for illegally attending some of the gatherings, including a “bring your own booze” party in the Downing-Street Garden in May 2020. Johnson admitted attending that party and apologised, since, as he said, he thought it was a work event.
The Daily Telegraph already reported that two separate staff parties were held in Downing Street on the eve of Prince Philip’s funeral last year, and during a time when Britain was still in strict lockdown.
As a result, and following public anger, the British Prime Minister has been urged to resign. On Tuesday, the Metropolitan police announced that they have opened a criminal investigation into some of the gatherings. As early as Wednesday, the government could expect Senior civil servant Sue Gray to turn in her report and Johnson's office has promised to publish its findings. The Prime Minister will address Parliament about it soon after. Gray’s report is an investigation into the “partygate” scandal and the 16 parties held at Downing Street and in government buildings during lockdown restrictions in 2020.
The Fed is scheduled to announce its policy decision on Wednesday (26/01/2022) during the US session and investors will be closely watching for any signs regarding the timing of its policy tightening cycle. The markets have fully priced in a Fed rate hike in March and expect a total of four hikes in 2022. If FOMC Chairman Jerome Powell notes that they could start reducing the balance sheet in the second half of the year this could boost the dollar and weigh on GBP/USD. On the other hand, it is expected that Powell could adopt a cautious tone on policy tightening which could push the US dollar lower. In that case, the pound could rise against the USD.
Bank of England and UK Stocks
In the meantime, expectations that the Bank of England will hike interest rates further at the upcoming meeting has helped support the British pound.
Tuesday’s outperformance by the FTSE 100 demonstrates that there is strong international demand for UK assets. The FTSE 100 has outperformed its major global peers and managed to hold on to most of yesterday’s rebound. If demand for UK stocks continues, then the pound could find further support.
Investors are now expecting another rate hike at the Bank of England in February which continues to provide Sterling support.
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