Sterling edged lower on Friday as a resurgence in oil prices tempered investor appetite for the pound, though the currency remained positioned to record a weekly gain following an unexpectedly hawkish Bank of England policy outcome.
At 12:52 GMT the pound was 0.3% weaker versus the dollar at $1.34, a partial reversal of Thursday’s 1.31% rally. For the week, sterling was still up 1.2%.
Across other crosses, EUR/GBP was largely unchanged as tightening expectations priced into both the European Central Bank and the Bank of England broadly offset one another. Meanwhile EUR/USD slipped 0.2% to 1.15, pulling back from Thursday’s 1.2% advance as the dollar found tentative support, even with the ECB signaling that an April rate increase was a serious possibility.
The Bank of England surprised markets on Thursday with a unanimous 9-0 vote to keep borrowing costs unchanged, confounding traders who had expected at least two MPC members to prefer a cut. In a notable procedural shift, the committee’s most dovish member, Swati Dhingra, publicly discussed the possibility of rate hikes as a means to stabilise inflation dynamics. In response, money markets adjusted quickly, with traders pricing roughly 80 basis points of tightening by year-end.
ING warned that such rapid repricing may overshoot fundamentals, cautioning that the conditions for second-round inflation effects are less marked than they were in 2022.
Despite the BoE’s surprise, oil prices remained the primary force moving markets. Brent crude exhibited volatility amid lingering uncertainty tied to the Iran conflict and transit risks through the Strait of Hormuz. "Rate expectations should remain fluid and commodity price dependent, and continue to play a secondary role for FX," said Francesco Pesole, FX Strategist at ING.
Pesole added that the BoE’s hawkish tilt was nonetheless providing some incremental support for sterling, though geopolitical developments continued to set the broader market tone.
ING maintained a bullish stance on EUR/GBP, targeting 0.88 by the end of the second quarter, and flagged May local elections together with the prospect of BoE cuts further out as drivers of that view.
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