Sterling is not granted much potential for a recovery – Commerzbank

As generally expected, the Bank of England (BoE) hiked the key rate by 50 bps to 3.50%. Why did Sterling ease following the decision? In my view of Antje Praefcke, FX Analyst at Commerzbank, there are three different possible explanations.

If you hesitate once, no one will trust you again

“(1.) The market might still assume that the BoE will not act with sufficient determination against inflation. Always along the lines of: if you hesitate once no one will trust you again.”

“(2.) Or the market is concerned that the BoE might hike its key rate too quickly after all and then overshoot, thus exacerbating the economic misery that is already foreseeable.”

“(3.) The market seems to generally question the willingness of central banks to tighten monetary policy. After the BoE hesitated for months, the market now thinks it can be least trusted to suddenly turn into an uber-hawk so that Sterling does not stand a chance either against the euro or the Dollar.”

“I tend towards a mix between (1.) and (3.). However, whichever explanation you pick, the result is fundamentally the same: Sterling is not granted much potential for a recovery and is likely to generally remain under depreciation pressure.”