View the article online at http://citywire.co.uk/wealth-manager/article/a752462
Hawkish BoE rate outlook rockets pound toward $1.70
by David Campbell on May 21, 2014 at 11:44
Sterling leapt against the dollar this morning following the release of Bank of England minutes which have recalibrated expectations of the schedule for UK rate rises.
The GBP/USD cross briefly broke back above $1.69, recovering much of its losses this month following the release of an unexpectedly dovish Inflation Report.
Having risen from $1.685 the hit $1.6901 before falling back to $1.688, also encouraged by strong retail spending figures. Despite quickly topping out, the strength of the move suggests that the pound could make another try for $1.70, a value last seen in 2008.
‘The pound’s spike this morning suggests investors are finding a very different policy outlook based on today’s meeting minutes,’ said Nawaz Ali, analyst at Western Union Business Solutions.
‘If, as expected, interest rates will rise in small increments when the time comes, then the first hike may need to come sooner. This was just one of the key messages which traders latched onto this morning, pushing the pound up to 1.2341 against the euro.’
Traders were responding to the suggestion that at least two member of the BoE monetary policy committee could soon be prepared to vote for an increase in the base rate.
While the vote to hold was unanimous the minutes stated that ‘for some members the monetary policy decision was becoming more balanced,’ and the Inflation Report had caused some dissent.
Market expectations for a first rate hike had previously pencilled it in within the second quarter of 2015.
‘This has cast serious doubt over whether the MPC will wait that long,’ said Craig Erlam, analyst at currency trading platform Alpari. ‘Especially following yesterday’s inflation reading which showed the rate rising to 1.8%, while the core number was in line with the central bank’s target of 2%.
‘While this doesn’t add pressure to the MPC to hike rates quite yet, as the economy improves and wages rise, so will inflation. A lower rate, which is appeared to be where they we were headed, would have bought the MPC more time.’
News sponsored by:
As the UK coalition government strives to rebalance the national economy, so called 'reshoring' looks set to play an increasingly important role in economic recovery.
Today's top headlines
With talk on interest rates on the horizon, our latest roundtable debate covers income investing against a changing backdrop
More about this:
On the road
by James Phillipps on Jul 23, 2014 at 14:34