Pound Sterling stretches its upside as markets expect the BoE to hold interest rates higher for longer than the Fed.
UK inflation remains sticky, particularly in the services sector, due to solid wage growth.
Investors await Fed Powell’s testimony for fresh cues on interest rate outlook.
The Pound Sterling (GBP) clings to gains, trading around 1.2670 on Monday’s European session as investors price in that the Bank of England (BoE) won’t lower interest rates anytime soon. The United Kingdom’s (UK) inflation rate remains the highest in the Group of Seven economies (G-7), forcing BoE policymakers to hold interest rates in the restrictive territory for a longer period.
Solid wage growth, which quickly feeds into inflation in the services sector, has kept the outlook of the UK’s core Consumer Price Index (CPI) sticky. BoE policymakers believe that the pace at which labor costs and service inflation are growing still doubles the pace required for inflation to sustainably return to the 2% target.
Prospects of higher interest rates benefit the Pound Sterling as this tends to attract higher foreign inflows.
This week, a light UK economic calendar could allow the market sentiment to guide the GBP/USD pair majorly. In the United States, Federal Reserve (Fed) Chair Jerome Powell’s testimony before Congress and the Nonfarm Payrolls (NFP) data will impact the market sentiment as they could provide fresh insights about when the Fed could start reducing interest rates.
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