Sterling Recovers from Losses as Dollar Frenzy Fades

Sterling rebounded lightly on Tuesday, putting some distance between the recently-recorded 21-month low against the US dollar, as traders cashed out their profits from the recent USD surge ahead of some critical central bank meetings this week. In the London session on Tuesday, GBP climbed by a decent 0.4% to 1.2557 against the USD as traders wait for a sustained push above the 1.2550 top.

The Bank of England (BoE) will hold its meeting on Thursday, where it should announce a possible 25 basis points (bps) rate hike. This event should dictate, to a good measure, the price dynamics around the British pound.

Sterling Weakness Sponsored by USD Rally Amid Aggressive Fed Rate Hike Stance

Over the past few weeks, the GBP/USD pair has recorded some notable declines as investors flooded the dollar amid anticipation of more aggressive rate hikes by the US Federal Reserve. Investors believed that this approach would allow the US economy to fare better than its contemporaries amid worsening global inflation and crippling economic growth.

Meanwhile, the US Fed will hold a two-day meeting between Tuesday and Wednesday and is expected to raise interest rates by nothing lower than 50 bps. The bank is also expected to sustain an aggressive interest rate policy over the coming several months, as money markets have already priced in a 270 bps rate hike.

Commenting on the near-term outlook of the Sterling, analysts at ING noted: “We think that would prompt a bit more dovish repricing across the GBP curve, and the pound could moderately weaken after the rate announcement.” The analyst added: “Such weakness should prove more pronounced against the dollar, which could find some more support from the FOMC meeting, and EUR/GBP upside could still be capped to the 0.8450-0.8500 area for now.”