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UK Pound Steadies Near 15-Month High; GBPINR Holds TO 106 Mark

Published on Jul 12, 2023 15:37

UK pound came under pressure near 15-month high after UK`s financial stability report highlighted increased credit risks on account of higher interest rates. Higher interest rates increase debt-servicing costs facing household and business borrowers. This makes them more likely to cut back on spending, worsening the economic environment, and increases the risk that they will default on loans, the Financial Stability Report stated. However, the bank assured that asset quality overall remains relatively strong, with higher interest rates having had a limited impact on credit risk so far.

Despite lower energy prices in the UK and Europe, global inflationary pressures have continued. Central bank policy rates in advanced economies have increased in response. The market-implied near-term path for UK Bank Rate has increased further since the December FSR, and is now expected to peak at around 6.2% in early 2024, July FSR noted. Since December 2021, the Bank of England interest rate (Bank Rate) has increased from 0.1% to 5%. Returning inflation sustainably to the 2% target will support the FPC`s objective of protecting and enhancing UK financial stability.

Meanwhile, yields on 10-year UK government bonds have risen sharply since the December FSR, particularly in May, mainly reflecting increases in market expectations for the path of Bank Rate given recent inflation data. The FSR mentioned that headline CPI inflation has recently begun to fall from recent peaks, but core inflation has been persistent, and the MPC judges that the risks to its May inflation projection are skewed significantly to the upside

GBPUSD however continues to hold above $1.29 amid steady expectations for a further rate hike by the BoE. Weakness in the dollar overseas ahead of the crucial US inflation data due later today is also keeping the pound supported. Currently the pair is quoting at $1.2930, down marginally on the day. On the NSE, GBPINR pair is currently trading slightly lower by 0.07% on the day but continues to stay propped up above all time high of 106 mark.

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