Fx Traders Upgraded Forecast of BoE’s Future Rate Hikes as Inflation Remains Stubbornly High

The pound Sterling held steady against the dollar and euro after an initial spike during today’s, June 22, volatile trading session following the Bank of England's, BoE, decision to raise interest rates by a chunky 50 basis points. Prior to the announcement, traders indicated there was a roughly 50% chance of a 50 bp increase and a 50% chance of a 25 bp hike. Fx traders now see the chance of a 25 bp rise at the BoE's next meeting in August at 66% and a 34% chance of a 50 bp hike, now expecting rates to peak at 6% in December.

At the time of writing, sterling was flat versus the dollar at $1.2742, and very slightly down against the euro at 86.06.

The yield on the 2-year Gilt, UK government bonds, which is highly sensitive to interest rate expectations, wavered after the BoE's decision and was last down marginally at 5.032%. Meanwhile, earlier yesterday, the British government reported UK inflation unexpectedly stayed pat at 8.7% in May. The data released by the Office for National Statistics Wednesday defied forecasts for a slowdown in inflation to 8.4% on an annual basis. Prices for recreation and cultural activities rose at a faster pace than in April and, although food inflation eased, it remained high, coming in at more than 18%.