Pound Rebound to Fade on Worries Rate Hikes Unlikely to Rescue Battered Currency

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By Yasin Ebrahim

AiVIF.com – The pound steadied Tuesday after plunging to a record-low a day earlier, but the respite is likely to run out of steam as some doubt whether a jumbo-sized rate raise including emergency hikes will save the beleaguered currency.

GBP/USD rose 0.33% to $1.0711, after falling to a record of low of $1.0384 a day earlier.

The respite comes as investors price in the prospect of the Bank of England delivering 1.5% of rate hikes by its November meeting, but that isn’t likely to turn the tide for sterling.

“A rate hike of over 150bp is currently priced in for the coming meeting,” Commerzbank said. Sterling, however, would remain “susceptible,” Commerzbank adds, as there were many “who had already questioned the BoE’s determination to fight inflation even prior to these events.”

Following the pound’s plunge to record lows against the dollar and a surge in U.K. government bond yields, the BoE hinted that the significant rate hike is on the horizon as the U.K's government's spending plan will add to country's inflation woes.

“It is hard not to draw conclusion that this will require a significant monetary policy response,” Bank of England chief economist Huw Pill was cited as saying Tuesday by multiple media outlets.

As well as the prospect of aggressive rate hikes, the U.K. chancellor Kwasi Kwarteng's promise to unveil a medium-term fiscal plan on Nov. 23 to show how the U.K. will fund its spending plan that includes the biggest tax cuts in over 50 years, also steadied the currency.

“The fiscal plan will set out further details on the government’s fiscal rules, including ensuring that debt falls as a share of GDP in the medium-term,” the Treasury said. Kwarteng “has requested that the OBR sets out a full forecast alongside the fiscal plan.”

Faced with pressure to reverse some of the spending measures, the new chancellor reportedly pushed back, saying he was "confident" that the growth plan and the upcoming medium-term fiscal plan "will work.”

While these moves ”buy time” for the pound, {ING says, without a quicker response from the BoE – before the November meeting -- sterling remains “vulnerable.”

The central bank, however, doesn't appear to keen to deliver an emerging rate hike, with Pill suggesting the central bank should wait until its next scheduled meeting in the first week of November.