Sterling strongly recovers as investors hope for next BoE’s hike

The pound Sterling has recovered as investors await the BoE’s 25 basis point interest rate hike to neutralize the Federal Reserve-BoE divergence. However, the GBP/USD pair’s revival faded as further policy tightening by the BoE will dampen the economic outlook.

The UK’s restrictive monetary policy has widened its scope to housing and manufacturing, with firms underutilizing their entire production capacity due to rising prices. Inflationary pressures remain persistent despite soft fuel and energy prices, and BoE Deputy Governor Ben Broadbent warns that interest rates will remain higher for a longer period.

UK firms continue operating at lower capacity due to a bleak demand outlook, and the potential risk of corporate default rises due to contracting debt-service coverage ability. Firms have slowed down recruitment processes as higher interest rates threaten economic prospects, but wage growth is extremely strong, indicating that firms are favoring talent retention rather than fresh acquisitions.

UK PM Rishi Sunak is opening for a face-to-face meeting with Chinese leader XI Jinping at the G20 summit to improve diplomatic relations with China.