Analysis / Daily / Finance / forex

UK Rate hike bets keep Sterling close to 7-1/2 year highs.

One Pound

Sterling inched lower against the euro on Monday but was still close to a 7-1/2-year high against a trade-weighted basket of currencies, as investors bet the  Bank of England will raise  interest rates in early 2016. With no major data releases or speeches by policymakers scheduled for yesterday, currency traders focused instead on Wednesday’s minutes from the BoE’s latest monetary policy committee (MPC) meeting. Markets took comments last week from BoE  Governor  Mark Carney that a decision on rates would come into « sharper relief » around the turn of the year as pointing to a rise as soon as November or February, when the bank releases its quarterly  Inflation Reports. Carney’s comments followed a surprisingly hawkish message from outgoing BoE policymaker David Miles, who said it was « likely to be right » to hike rates soon, and that it was « daft » to rule out the idea that UK rates could rise before those in the United States.

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Don’t pack away the currency presses just yet, Greece’s euro exit may be back on the table next year. There’s still a danger that Greece will be forced out of the euro region by the end of 2016, according to 71 percent of respondents in a survey of 34 economists. Seventy percent said they reckon Greece should be safe for the rest of 2015, though almost half said they thought the 86 billion-euro bailout package Prime Minister Alexis Tsipras is targeting will prove to be too small. While Tsipras is checking off the requirements to qualify for a third bailout, the flaws in the agreement he hammered out with euro-area leaders last week are fueling concerns that Greece will struggle to implement the three-year program. The European creditors are refusing to firm up their commitment to restructuring Greece’s debts, a move the International Monetary Fund says is essential for the country to stabilise its finances. There are also doubts about the 50 billion-euro target for asset sales and, more fundamentally, the merits of forcing more austerity on a shattered economy.

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The dollar ended higher versus its major peers yesterday following earlier hawkish comments from Fed official. The greenback traded narrowly but with a firm undertone in subdued Asian trading on Monday as Japan’s markets were closed for Marine Day holiday. The pair ratcheted higher to 124.39 in New York morning on dollar’s broad-based strength before retreating. St. Louis Fed chief James Bullard told Fox Business network in New York morning there was a higher than 50 percent chance the U.S. central bank will raise rates in September.

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