Pound riding high after BoE rate decision

The pound’s week of recovery continued on Thursday, with the Bank of England’s (BoE) interest rate decision giving Sterling an unexpected leg up.

The pound's week of recovery continued on Thursday, with the Bank of England's (BoE) interest rate decision giving Sterling an unexpected leg up.

What movement have we seen in the wise money markets?

In the wake of the BoE’s interest rate announcement, the pound briefly pushed above 1.15 against the euro and struck 1.23 against the US dollar (a fortnightly high).

The pound to Australian dollar exchange rate also bounced higher, climbing from 1.59 to 1.61. It was a similar story for GBP/NZD, with a rally from 1.74 to 1.77 taking the pound to its best levels in two months.

So, what happened?

BoE policymaker Kirstin Forbes was largely responsible for the pound’s surge on Thursday.

While the central bank voted to leave interest rates on hold, Forbes broke the mould and responded to the recent spike in consumer price pressures by pushing for an immediate rate increase.

Although the meeting minutes stated; ‘Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth’, the 8-1 split was enough to boost expectations for a rate adjustment in 2017.

In other currency news, the US dollar was able to recover some of the losses sustained after the Fedís interest rate decision ñ in which borrowing costs were increased but the outlook for future hikes was left unchanged.

The euro was also strengthened by the outcome of the Dutch election and confirmation that Eurozone inflation hit a four-year high. Thursday was less positive for the Australian dollar however, with the South Pacific currency falling in reaction to less-than-impressive domestic employment numbers.

What should you be looking out for?

The poundís run of gains just might continue next week if the UK’s inflation report shows another increase in consumer price pressures.

If the annual consumer price index rises above January’s rate of 1.8% it would put more pressure on the BoE to start raising interest rates. Higher odds of borrowing costs being increased in the near future would be pound-supportive.

The UK is also set to publish retail sales figures for February, another potentially influential report. Signs that consumer spending is faltering in the face of rising prices and tepid wage growth would add to the argument in favour of a near-term rate adjustment.

Before the weekend the euro could react to the Eurozone’s latest trade balance and construction output figures. We may also see the US dollar climb this afternoon if the University of Michigan confidence index reveals an improvement in sentiment. The measure is currently forecast to rise from 96.3 to 97.

Leave a Reply