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Market Update

The pound has been steady today and looks to be heading for its biggest monthly gain versus the dollar since November, as an apparent abatement in concern among investors over the banking sector drove flows away from the U.S. currency.

Sterling has risen by nearly 3% against the dollar in March and is hovering around eight-week highs.

Data this week showed UK grocery inflation hit a record high of 17.5% in March. Temporary shortages of certain food items, such as salad ingredients, helped drive the rise. But overall, at more than 10%, headline inflation in Britain is showing no signs of slowing down.

Similarly to the euro, the pound is being supported by central bank divergence. The Fed appears less certain about its next step even after the banking sector turmoil seems to have been contained.

Meanwhile, BoE Governor Andrew Bailey has said that the central bank may need to hike rates again after UK inflation unexpectedly rose to 10.4% in February and food inflation rose to a record high in March.

A report from the BoE on Wednesday showed the volume of mortgages approved by British lenders rose more than expected in February, which suggests the housing market downturn may be levelling off.

Expectations for what the BoE is likely to do this year in terms of monetary policy have changed drastically in March.

At the start of the month, markets were factoring in the probability that UK rates would peak close to 5% by the end of this year – which at that point, meant another 75 basis points in rate rises.

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