By Farouq Suleiman
LONDON (Reuters) – Sterling struggled to make headway against the dollar and eased against the euro on Thursday after the European Central Bank raised interest rates to their highest level in more than two decades.
At 1300 GMT, sterling was stuck at $1.2661, but had surrendered earlier gains against the euro, which was up 0.22% at 85.74 pence.
The ECB said it expected inflation to hover above its 2% target rate through to 2025 and hinted at more interest rate hikes, even as the euro zone economy lags.
The ECB said it had revised up its projections for inflation, excluding energy and food, for the next two years due to the implications of a “robust” labour market.
“Economic growth is likely to remain weak in the short run but strengthen during the course of the year as inflation comes down,” ECB President Christine Lagarde said at a news conference after the policy meeting.
On Wednesday, the Federal Reserve left interest rates unchanged after 10 successive hikes, but signalled a more hawkish tilt later this year.
However, Michael Hewson, chief market strategist at CMC Markets, said he saw the guidance from the Fed more as a mechanism to stop markets pricing in further U.S. rate cuts and remained fairly bullish on the pound against the dollar.
“We’ll probably see $1.30 over the course of the next few weeks and months,” Hewson said. “I don’t think many people buy the Fed’s guidance that they’re going to do another two rate hikes.”
Expectations for further UK rate hikes meanwhile have shot up this week after Tuesday’s jobs data.
The Bank of England plans to hold a review into how it forecasts the economy, after lawmakers criticised its failure to foresee the scale and duration of inflation.
Two-year gilt yields were 5.5 basis points higher on the day at 4.88%, having touched their highest since 2008 on Tuesday.
Markets are pricing in a 25-bp BoE rate hike next week, and slightly less than a 20% chance of a 50-bp move.
(Reporting by Farouq Suleiman; Editing by Kirsten Donovan)
