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STERLING TICKS HIGHER AS FOCUS STAYS ON GLOBAL RATE OUTLOOK Sterling ticked higher against a softer dollar and euro on Thursday, although traders were still focused on the global backdrop after expectations rose this week for bigger interest rate hikes from the U.S Federal Reserve. By 1158 GMT, the pound was up 0.42% against the dollar at $1.1887 and 0.1% higher against the euro at 88.892 pence. Nevertheless, the pound is down 1.3% against the dollar for the week as rate-hike expectations from the Fed have ticked up. “It has been a big week for the dollar and U.S. interest rates, that is the dominant story this week. We had Powell’s testimony on Tuesday and Wednesday and U.S. jobs data tomorrow,” ING strategist Chris Turner said. Looking at the UK, Turner pointed to key data in the coming weeks before the Bank of England convenes on March 23 for its next policy meeting.UK employment and wage data will be published on March 14. Next week will also see British finance minister Jeremy Hunt announce his new budget. “There have been signs in the Bank of England’s Decision Maker Panel’…that tightness in the labour market is easing,” said Turner. “Any sign of further easing in either wages or CPI numbers number would be a negative event risk for sterling – and vice versa,” said Turner. The market is pricing in a 91% chance of a 25-basis point rate hike when the BoE meets on March 23 for its next policy meeting, with an outside chance of no change. “They haven’t quite kept up pace with what’s happening on the other side of the Atlantic. That’s one of the reasons sterling is a bit lower against the dollar (this week),” said Turner. Next week’s British budget will include closely watched growth forecasts for hints over the outlook for the UK economy. On Wednesday, the British Chambers of Commerce forecast that the country’s economy is on track to shrink less than expected this year and avoid two consecutive quarters of contraction, the technical definition of a recession. DOLLAR TOWERS ON LINGERING EFFECTS OF POWELL’S TESTIMONY The dollar was perched near a three-month high on Thursday as Federal Reserve Chair Jerome Powell’s message that interest rates would have to go higher and possibly faster to tame inflation dominated sentiment and kept the U.S. currency in bid. In the second day of his testimony to Congress on Wednesday, Powell reaffirmed his hawkish message, though struck a cautious note that debate on the scale and path of future rate hikes was still underway and would be data-dependent. That caused the U.S. dollar to pause its towering rally from earlier in the week, retreating from close to a three-month top against the Japanese yen to last stand at 136.86. The euro and sterling similarly edged away from their multi-month lows, rising 0.02% to $1.0546 and 0.09% to $1.1854, respectively. As a result, the U.S. dollar index, which measures the greenback against a basket of six peers, slipped 0.02% to 105.61. The index, however, remained near a three-month peak of 105.88 hit in the previous session, having extended Tuesday’s 1.3% surge, its biggest daily jump since last September. “Powell conceded that the March decision is data-dependent,” said Thierry Wizman, Macquarie’s global FX and rates strategist. “The question facing us, therefore, is whether January’s economic reacceleration was a blip or a trend.” A slew of strong economic data out of the United States in previous weeks, pointing to persistent inflationary pressures, led to Powell saying on Tuesday that the Fed will likely need to raise interest rates more than expected, and was prepared to move in larger steps. Traders scrambled to reprice a more aggressive pace of interest rate hikes in the wake of Powell’s comments, with Fed funds futures now implying a 70% chance the Fed will raise rates by 50 basis points this month, up from just about 9% a month ago STERLING STEADIES AFTER POST-POWELL DIVE Sterling steadied on Wednesday after falling to an almost four-month low against the dollar as investors paused for breath after the U.S central bank chair said he is prepared for bolder rate hikes. Sterling flattened at $1.1825 after briefly touching its lowest level against the dollar since November during Asia trading hours. It sank 1.7% against the U.S. currency on Tuesday when Fed Chair Jerome Powell told U.S. lawmakers that the central bank was prepared to raise interest rates in larger steps. Against the euro, sterling also levelled out at 89.15 pence, a day after touching its lowest point against the European single currency since mid-February. The pound has slipped around 1.6% against the dollar so far in March, while the euro was just 0.3% lower versus the dollar. The pound’s higher sensitivity to risk is making it more vulnerable than the euro to Fed hawkishness, said Francesco Pesole, FX strategist at ING, adding that European Central Bank rate hikes expectations was also supporting the single currency. “Euro/GBP faces upside risks every time the Fed’s hawkish messaging hits risk sentiment … Incidentally, at the current juncture, the euro is looking more attractive than the pound, thanks to the ongoing hawkish repricing in ECB rate expectations and a more encouraging domestic outlook,” he said. Taking the Fed’s lead, money markets are now fully pricing in a 25-basis-point increase from the Bank of England later this month. They are pricing a 50-bps increase from the ECB and the Fed at their next policy meeting this month. DOLLAR STEADY AS TRADERS WAIT ON JOBS DATA The dollar was steady on the day but down from three-month highs reached earlier on Wednesday after Federal Reserve Chairman Jerome Powell offered no major surprises on his second day of testimony before Congress and as investors waited for jobs data on Friday. Powell reaffirmed his message of higher and potentially faster interest rate hikes, but emphasized that debate was still underway, with a decision hinging on data to be issued before the U.S. central bank’s policy meeting in two weeks. “Not much from Powell has changed the stronger trajectory for the dollar,” said Joe Manimbo, senior market analyst at Convera in Washington. “The market now is just gearing up for payrolls on Friday and inflation next week to see whether or not the Fed is on track for the bigger 50 basis point rate hike later this month.” The dollar jumped on Tuesday after Powell said on Tuesday that the Fed will likely need to raise interest rates more than expected in response to strong data and is prepared to move in larger steps if the “totality” of incoming information suggested tougher measures were needed to control inflation. That prompted traders to reprice their rate expectations. Fed funds futures traders now see a 70% probability of a 50 basis-point hike at the Fed’s March 21-22 meeting, up from around 22% before Powell spoke on Tuesday. The rate is now expected to peak at 5.69% in September. Investors are focused on February jobs data due on Friday for confirmation that continued strong jobs growth supports bigger rate increases. The dollar has jumped since data on Feb. 3 showed that employers added 517,000 jobs in January STERLING DIVES AS BOE WARNS OF RISKS, POWELL FLAGS HIGHER RATES Sterling sank to a two-month low against the U.S. dollar on Tuesday, after a Bank of England (BoE) policymaker said the pound could be vulnerable to other central banks’ outlooks, while the Federal Reserve chair said interest rates might have to increase further. The pound could depreciate if investors have not yet fully priced in hawkish messages from the Fed and European Central Bank (ECB), BoE rate-setter Catherine Mann told Bloomberg Television in an interview. “The important question for me with regard to the pound is how much of that existing hawkish tone is already priced into the pound,” she said. Asked how much of the messages from other central banks about higher interest rates outside Britain had been priced in to the value of sterling, Mann said: “They’ve been talking hawkish for a while but I think perhaps there’s more to go.” Mann’s comments came just a few hours ahead of testimony before Congress by Fed Chair Jerome Powell, which pushed the U.S. dollar index more than 1% higher as he said the ultimate level of interest rates was likely to be higher than previously anticipated. As Mann is considered “the most hawkish member” of the BoE Monetary Policy Committee, her remarks on sterling was not a good endorsement for the currency, said Jane Foley, Head of FX Strategy at Rabobank London. “Mann was referring to the hawkishness of the Fed driving the U.S. dollar higher versus the pound, but it can be inferred from this remark that she doesn’t expect BoE policy to match the pace of the Fed,” Foley said. The pound has slipped around 1.3% against the dollar so far in March, while the euro was flat versus the dollar.Money markets are pricing in that the BoE interest rate will peak in September at 4.75%. It currently stands at 4% after ten rate increases in a row since late 2021.