Pound treads water ahead of ECB rate decision as Fed signals more hikes

On Wednesday, the Fed left interest rates unchanged after 10 successive hikes, but signalled a more hawkish tilt later this year. However, Michael Hewson, chief market strategist at CMC Markets, said he saw the guidance from the Fed more as a mechanism to stop markets pricing in further U.S. rate cuts and remained fairly bullish on the pound against the dollar.

Sterling struggled to make headway against the dollar on Thursday ahead of the European Central Bank's interest rate decision and after the U.S. Federal Reserve signalled more hikes in borrowing costs were possible.

At 1040 GMT, sterling was barely moved at $1.2660 and was up 0.12% against the euro at 85.65 pence. On Wednesday, the Fed left interest rates unchanged after 10 successive hikes but signalled a more hawkish tilt later this year.

However, Michael Hewson, chief market strategist at CMC Markets, said he saw the guidance from the Fed more as a mechanism to stop markets pricing in further U.S. rate cuts and remained fairly bullish on the pound against the dollar. "We'll probably see $1.30 over the course of the next few weeks and months," Hewson said. "I don't think many people buy the Fed's guidance that they're going to do another two rate hikes."

Expectations for further UK rate hikes meanwhile have shot up this week after Tuesday's jobs data. The market will now closely watch the ECB's decision. The eurozone central bank is expected to raise rates for an eighth straight time to the highest level in 22 years.

With inflation in the eurozone more than triple its 2% target, the ECB is expected to continue to tighten its monetary policy with investors also waiting for its latest economic forecasts. The Bank of England plans to hold a review of how it forecasts the economy after lawmakers criticized its failure to foresee the scale and duration of inflation.

Two-year gilt yields were 5.5 basis points higher on the day at 4.88%, having touched their highest level since 2008 on Tuesday. Markets are pricing in a 25 bps BoE rate hike next week and a less than 20% chance of a bigger 50 bps move.