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Sterling steadies near 20-month high vs euro on Bailey's fresh rate hike signals

10/18/2021 | 11:02am EST
FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna

(Reuters) - Sterling steadied near a 20-month high versus the euro on Monday after Bank of England Governor Andrew Bailey sent a fresh signal that the central bank is gearing up to raise interest rates as inflation risks mount.

Sterling has gained 5.5% versus the euro this year, with analysts pointing to expectations the BoE will raise rates as a major factor supporting the pound, while the British economy has struggled with a shortage of labour, an energy crisis and rising COVID-19 cases.

During an online panel discussion on Sunday organised by the Group of 30 consultative group, Bailey said the BoE will "have to act" in its monetary policy meetings on the risk of medium term inflation.

He continued to believe that the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer.

On the expectations of rate hikes, 2-year British government bond yields jumped by 16 basis points to their highest level of 0.751% since May 2019.

Overnight, sterling surged again to its highest of 84.25 pence versus the euro since February 2020. By 1450 GMT, it lost some steam, trading 0.1% lower at 84.54 pence.

Versus a strengthening dollar, it edged 0.1% lower at $1.3726, but not far from a one-month high touched on Friday.

The Bank of England seems to be using the weekends "to prime the markets for imminent rate hikes", Deutsche Bank investment strategist Jim Reid told clients. "Sterling has seen little change" as markets were already pricing in a rate action.

Last weekend, Bailey stressed the need to prevent inflation from becoming permanently embedded, and fellow policymaker Michael Saunders said households must brace for "significantly earlier" interest rate rises.

The BoE looks set to be the first major central bank to raise interest rates since the beginning of the pandemic early last year. Investors were on Monday betting on a interest rise to 0.35% in November.

Traders were also awaiting this week CPI September inflation data for Britain due on Wednesday.

Graphic: Sterling euro Oct. 18

Graphic: World FX rates in 2021 http://fingfx.thomsonreuters.com/gfx/rngs/GLOBAL-CURRENCIES-PERFORMANCE/0100301V041/index.html

Graphic: Trade-weighted sterling since Brexit vote http://fingfx.thomsonreuters.com/gfx/rngs/BRITAIN-STERLING/0100310M299/index.html

(Reporting by Joice Alves, editing by Peter Graff and Mark Heinrich)

By Joice Alves

© Reuters 2021
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