The Bank of England is widely seen as likely to move toward tighter monetary policy if energy prices continue to rise, and expectations are growing for rate hikes in November and next February. Sterling has been bought back to around the 1.32 level, while the yen has also weakened in response.
In today's foreign exchange market, as the dollar's gains lost momentum, GBP/USD was bought back to the mid-1.32s, while GBP/JPY fell to the low 208s as the yen was bought.
The rising likelihood of the Bank of England moving toward tighter monetary policy in response to higher energy prices has led many to revise their policy rate outlook to include hikes in November and next February.
Meanwhile, the view that the Bank of England will continue to hold rates if supplies of crude oil and petroleum products improve remains widespread. There is also a view that, in light of recent news concerning the situation in the Middle East, an extended period of holding rates unchanged will become more difficult.
In remarks made today, Governor Bailey indicated that the likelihood of a rate hike would increase if the price shock resulting from the situation involving Iran were to persist.