Dollar Strengthens while Sterling remains volatile

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The U.S. dollar was at two-week highs against a currency basket today, rising last night after U.S. Senate leaders announced a two-year budget agreement.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was up 0.12%.

The dollar rose after U.S. congressional leaders on Wednesday reached a two-year budget deal to raise government spending by almost $300 billion. The budget agreement averted the risk of a government shutdown or a debt default.

The gains in the dollar were a continuation of the increases that came amid the sharp drop in stock prices on Friday and on Monday, which saw the Dow Jones Industrial Average record its biggest single-day point decline on record.

The Bank of England delivers its latest policy announcement and updated economic forecasts at midday.

Meanwhile, Governor Carney’s press conference will take place at 12:30 GMT. At the November meeting, the Bank of England delivered its first hike in interest rates since 2007 and highlighted the need for further increases to ensure that inflation returns to target – a view reiterated in the minutes to the December policy meeting.

Against a backdrop of economic resilience, speculation over the timing of the next rate hike has increased, with interest rate markets fully pricing in a rate hike by Q4 this year, while attaching a 50% probability of an increase occurring by May.

We remain comfortable with our call for a quarter-point rate increase in August, but acknowledge that the risk of a May hike has risen, especially if a transitional arrangement is agreed by the end of March for after the UK leaves the EU.

We expect the Bank of England to nudge up their economic growth forecasts and to signal that inflation continues to overshoot modestly the 2% target at the end of the forecast horizon – similar to the projections made at the time of the November Inflation Report.

While we envisage Governor Carney to reiterate that there is limited tolerance for above-target inflation, at this stage, we expect a unanimous voting pattern in favour of unchanged interest rates with the more-hawkish members, Ian McCafferty and Michael Saunders unlikely to break ranks so soon after the November rate hike.

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