EUR/GBP bulls take back control and tighten their grip in New York trade

EUR/GBP has climbed to the highest level of the day in New York, travelling from a low of 0.8472 to 0.8499 around the time of writing. Initially, sterling was getting a start of the week boost as the Bank of England warned of higher interest rates.

However, cable has dropped as the greenback finds its footing on the forex board once again. This has made some room higher up for the euro on the currency strength indicator. GBP is in the last position currently and down 0.03% on the day vs the greenback in the lows near 1.3601. Brexit angst and the energy crisis is a likely contributing factor to its recent decline. 

• Bank of England says to brace for interest rate rises

In weekend interviews, members of the Bank of England warned the public that inflation levels in Britain were concerning and told the nation to brace for earlier interest rate increases. BoE Governor Andrew Bailey stressed the need to prevent inflation - running above the 2% target - from becoming permanently embedded. 

Additionally, BoE policymaker Michael Saunders told households to get ready for "significantly earlier" interest rate rises as inflation pressure mounts in the British economy, the Telegraph newspaper said on Saturday.

"I'm not in favour of using code words or stating our intentions in advance of the meeting too precisely. The decisions get taken at the proper time," Saunders said.

"I think it is appropriate that the markets have moved to price a significantly earlier path of tightening than they did previously," Saunders added.

Reuters reported that ''Interest rate futures traded on the CME showed November contracts were pricing in as much as a 20% probability of a rate hike next month compared with 12% last week, while December futures were pricing in a 45% probability of a rate increase by then.'' Additionally, the news agency notes that a ''separate estimate from Refinitiv based on interest rate futures suggested a 15 bps rate hike by December is now fully priced in.''

Brexit angst anchors GBP

David Frost, the Brexit minister, has been accused by the EU of trying to undermine serious attempts to solve the problem of the Northern Ireland protocol, the Irish foreign minister has said. Simon Coveney, Irish minister for foreign affairs, said he had spoken to Lord Frost’s counterpart, the European Commission vice-president, Maroš Šefčovič, on Sunday. They have agreed there would come a point when “the EU will say: enough, we cannot compromise anymore”, the Irish minister said.

The protocol seeks to avoid the need for a land border between Northern Ireland and the Republic of Ireland to the south. This has long been the most complex Brexit issue within the saga. The compromise struck as part of Brexit talks kept Northern Ireland aligned to key bits of EU law.

However, the two sides disagree on its implementation and this month will see both sides putting forward a fresh set of proposals in what might be the final disagreement before Britain implements its move to suspend the post-Brexit Northern Ireland protocol. This would pose a major test of European unity, likely resulting in a trade war that would be damaging for both sides. 

Britain's energy crisis is spiralling

Industry leaders are warning that the energy crisis could halt factory production. British companies that produce steel, paper, glass, cement, ceramics and chemicals say they will be forced to close factories. Alternatively, the companies said they would have to pass on rising costs to consumers unless the UK government provides relief from soaring energy prices.

The forex market will take into account that UK companies are being made less competitive compared to international rivals that have received help from their governments, weighing on the pound.

What the forex space is needing to gauge, is whether rate hike increases to battle inflation pressures outweigh the negative prospects of higher energy prices on the UK's SMBs and industrial firms. In this respect, The British Chambers of Commerce has asked the government to implement an energy price cap to prevent smaller companies from closing down.