The GBP/EUR exchange rate was up 0.43% on Thursday after the US Federal Reserve gave the green light to interest rate hikes to fight inflation. The bank said rates are expected to rise “soon” but also at a “faster pace.” Other central banks such as the BoE don’t like to be outliers to the Fed and will feel comfortable with further rate hikes.

The GBP against EUR is trading at 1.1992 with UK retail sales ahead this morning.

The US Federal Reserve opens the door to the Bank of England

US Federal Reserve officials agreed they should raise interest rates “soon” to fight inflation, and at a “faster pace” in their final meeting minutes.

In January, the country’s consumer price index jumped 7.5% from a year earlier, hitting a 40-year high. The minutes actually came ahead of the recent inflation reading and policymakers agreed that the central bank’s target interest rate would be raised at a “faster pace” than in 2015.

The latest comments also included a statement that a reduction in the pandemic stimulus would be needed.

“Participants observed that, given the current high level of holdings of Federal Reserve securities, a significant reduction in the size of the balance sheet would likely be appropriate,” a summary of the meeting said.

Investors now expect the US bank to start raising rates by 0.50% in March and Goldman Sachs has predicted the Fed will hike rates four times this year.

For the Bank of England, these comments are an automatic buffer to continue on its own course of raising rates. Central banks have long followed the Federal Reserve’s lead, and BoE policymakers will feel more comfortable raising rates knowing that their US counterparts will hike four to five times this year.

European leaders meet to discuss Russia

European leaders were due to meet in a special session on the Russian threat posed by the deployment of more than 130,000 Russian troops near the border with Ukraine.

The EU’s 27 national leaders were due to discuss the issue and potential sanctions from Europe and Russia could have a negative effect on tensions.

The latest U.S. saber cut said a “swift and firm response” would follow if Russia recognizes eastern Ukraine’s territories as independent. The areas have been involved in conflicts since 2014.

Russia’s lower house has asked Putin to recognize the independence of the Donetsk and Luhansk regions in eastern Ukraine, but the United States has said it will violate the Minsk agreements, which were signed in 2015.

The British pound against the euro awaits UK retail sales on Friday with a strong rebound expected in January following the December Omicron hit. Markets are expecting a reading of 8.7% after -0.9% last month. A higher number would boost the pound, but economists are likely worried about the pressure on households from rising inflation and may not be too excited.