Joice Alves

LONDON (Reuters – Sterling rose to its highest point in nearly 10 weeks against a weakening US dollar on Tuesday. The rise was supported by expectation that the Bank of England might raise interest rates.

To $1.3620 the pound gained 0.2% versus the dollar, the highest level since Nov. 4 when it fell 1.5% after the BoE shocked the markets by leaving interest rates unchanged.

The pound was 0.1% higher at 83.36pence, compared to the euro. This is its highest level since February 2020.

Investors have increased their expectations over the last weeks that the BoE would raise interest rates next month, following a surprise December hike by 15 basis points to 0.255%.

Commerzbank FX analyst You-Na Park Heger (DE:) said that while the BoE’s interest rate rises are likely to support sterling, she also stated that some of that is already priced in so the GBP rally may run out of steam.

Jane Foley from Rabobank London’s FX Strategy said that sterling had also been supported by signs of weakness of the U.S. Dollar. It traded on Tuesday against a basket currency, well below its November 16-month highs. However, rising expectations this month of a Federal Reserve increase in interest rates have led to sterling trading lower than it did last week.

The market has already taken long USD positions, making it hard for the greenback react to speculations about Fed tightening. Foley suggested that cable freedom could push higher in coming weeks.

She said that the market will begin to relax some of its expectations about BoE rate increases as it is likely that pressure on UK real incomes will “become more evident as winter progresses”.