Early on Thursday in European trade, the U.S. dollar continued its upward trend as sterling fell as the relief rally triggered by the Bank of England’s intervention in the bond market fizzled out.
The Dollar Index, which measures the value of the U.S. dollar against a basket of six other currencies, increased 0.8% to 113.438 at 03:10 E.T. (07:10 GMT) after having its worst day in more than two years. The index is close to its most recent two-decade high of 114.653.
To support the gilt market, the BoE announced an emergency bond-buying program on Wednesday. The gilt market had fallen along with the pound after the incoming U.K. administration proposed big tax cuts, possibly funded by significant borrowing. As a result, the British pound appreciated the most since mid-June. However, the increase was short, as GBP/USD fell 0.9% to 1.0787 on Thursday.
Experts Predict a Rate Hike
If the BoE continues to rule out an emergency boost, it will pressure it to announce a sizable interest rate hike at its next meeting in early November to support the struggling pound. Investors are undoubtedly preparing for a significant reaction. According to analysts at ING, markets are currently pricing a terminal rate above 6% for next year. While we can debate whether this is a reliable gauge of expectations given this level of market stress, it’s undeniably true that investors are positioning for a sizable reaction.
Later on, Thursday, spectators will focus on the appearances of Bank of England representatives David Ramsden, Silvana Tenreyro, and Huw Pill. The U.S. dollar recovered its footing after suffering losses in the previous session, causing the EUR/USD to drop 0.7% to 0.9667.
The current worsening of the energy crisis in the Eurozone and the announcement by Sweden’s coast guard that it has found a fourth gas leak on the damaged Nord Stream pipelines weigh on the single currency. The European Union has pledged a “strong” response to any deliberate interruption of its energy infrastructure. It believes that sabotage was responsible for the leaks on the pipelines bringing gas from Russia to Europe.