By Farouq Suleiman and Yoruk Bahceli
LONDON (Reuters) -The pound held steady against the dollar and euro after an initial surge during a volatile trading session on Thursday following the Bank of England’s decision to raise interest rates by 50 basis points.
At 1350 GMT, sterling was down 0.13% versus the dollar at $1.2751, and very slightly down against the euro at 86.13 pence.
The yield on the 2-year gilt, which is highly sensitive to interest rate expectations, wavered after the BoE’s decision and was little changed at 5.04%.
There was also an inversion of the 2- to 10-year yield curve, which often signals that investors expect a recession in the British economy.
Joe Tuckey, head of FX analysis at Argentex said that despite a knee-jerk upside reaction to the 50 bps hike, sterling could struggle to make headway as markets anticipate the negative pressure that higher rates will have on the economy.
“The lag effect of yet more tightening may mean that UK economic data is bound to deteriorate in coming months,” Tuckey said.
UK homebuilders’ and banking stocks also fell following the rate hike.
The BoE’s decision raised interest rates to 5%. Prior to the announcement, traders indicated there was a roughly 50% chance of a 50 bp increase and a 50% chance of a 25 bp hike.
“The Bank of England has surprised markets with a 50 basis-point rate hike, following a series of smaller moves through this year,” James Smith, developed markets economist at ING, said, pointing to this week’s inflation data which saw what he called a “material spike” in services inflation.
Markets now see a 66% chance of a 25 bp rise at the BoE’s next meeting in August and a 34% chance of a 50 bp hike, and anticipate rates will peak at 6% in December, up marginally from 5.9% earlier.
Wednesday’s data, which showed the rate of inflation remained unchanged from the previous month at 8.7%, saw the pound retreat against the dollar and euro as money managers expected the task faced by the BoE to be more substantial than initially envisioned.
British finance minister Jeremy Hunt said the Bank of England had his full support and “tackling inflation relentlessly must be the immediate priority”, in a letter to BoE Governor Andrew Bailey after the central bank raised interest rates.
(Reporting by Farouq Suleiman and Yoruk Bahceli; Editing by Emelia Sithole-Matarise, Kirsten Donovan and Christina Fincher)
