Sterling sinks on firmer US dollar post BoE’s hike

The US dollar is firmer and was able to record gains against major currencies on Thursday after Fed Chair Jerome Powell signaled US interest rates will likely peak at a higher level than markets expected, while sterling fell after the Bank of England raised rates but warned of a “very challenging outlook.”

The BoE lifted UK interest rates to 3% from 2.25% in its largest single increase since 1989, as it battles the twin forces of a slowing economy and red-hot inflation.

The UK central bank forecasts inflation will hit a 40-year high 11% during the current quarter, but it pushed back against expectations for further steep rate hikes. The bank said Britain has already entered a recession that could potentially last two years, longer than during the 2008-09 financial crisis.

“It is very premature to be thinking about pausing” on the effort to lift the federal funds target rate, Powell said in a news conference on Wednesday.

The dollar’s dominance will continue as thoughts of a recession grow for the global economy, which will drive more flight to safety bids towards the dollar. The futures markets on Thursday priced in US rates peaking at 5.15% at the June meeting in 2023, which was up from about 4.9% initially expected in May.

In afternoon trading, the euro fell 0.6% against the dollar to $0.9758 . That pushed the dollar index up 0.7% on the day at 112.86 . Earlier, it touched 113.15, its highest since October 21.