LONDON: Sterling strengthened a touch against the dollar and euro on Monday as traders grappled with the implications of the previous week’s outsized rate hike by the Bank of England.

The pound rose 0.15% against the dollar to $1.2735, regaining some of its 0.83% loss from the week before, the currency’s biggest weekly decline since mid May.

It also firmed against the euro, which was down 0.13% at 85.54 pence, as soft German business sentiment data weighed on the European common currency.

Sterling clobbered as jumbo rate hike raises risk of recession

Monday’s moves in sterling were in the shadow of the Bank of England’s larger-than-expected 50 basis point interest rate hike, which pushed market pricing for the peak in the Britain’s key interest rate over 6%, implying a further over 100 basis points of tightening.

In contrast, markets expect other major central banks to be near if not at their rate peaks.

Traders are trying to assess whether this should mean a stronger pound - typically currencies benefit from higher rates compared to peers - or whether the ramifications for economic growth in Britain mean the pound will weaken.

“Price action points to (sterling) being at an inflection point at which further rates hikes are no longer bullish for the currency,” said BNP Paribas analysts in a note.

The pound also hit a fresh seven-and-a-half year high against the under-pressure Japanese yen, reaching 182.98 yen before retreating after Japan’s top currency diplomat stepped up warnings against recent yen weakening.

Speeches by several BOE policy makers will be closely watched this week, most notably governor Andrew Bailey who speaks on Wednesday on a panel with top central bankers from the European Central Bank, Federal Reserve and Bank of Japan.