Sterling burns past $1.34 on BoE rate hike warning

GBP  USD Retail Sentiment

GBP/USD price technical analysis - 12th September 2017

Two members felt that a quarter-point hike should occur immediately, against a backdrop of the annual British inflation rate surging to 2.9 per cent in August from 2.6 per cent in July. Any more defections when the MPC meets on Thursday could push the pound higher, and there has been talk that chief economist Andy Haldane could shift to that camp.

But the market has been moved by remarks made in the commentary afterwards, where the central bank said if the economy, inflation and employment rate continue at the same level, a majority of the members see scope to reduce the level of stimulus in the economy.

The fall in the jobless rate to 4.3 per cent in the three months to July, when Britain created jobs faster than at any time since 2015, might embolden the minority of the bank's policymakers who are pressing the case for an early hike in borrowing costs.

On the news, sterling jumped 0.63% to $1.329 and 0.62% to €1.118 in intraday trading while the FTSE 100 was down 0.38% to 7,352 points.

After the inflation data, sterling surged to as much as $1.3288 - its highest since September 13, 2016. It also gained against the euro, following a strong start to the day against its peers ahead of the release of figures.

The pattern over recent years has been for such expectations to fade rapidly, however, and most economists polled by Reuters at the end of August did not expect a rate rise until 2019.

As expected, the Bank of England (BoE) decided on Thursday to hold interest rates steady at a record low as well as to make no changes to its asset purchase program.

"With the labour market already very tight, and the economy set to strengthen in the second half of 2017 in our view, an acceleration in wage growth looks likely".

This leaves the Bank of England in a very precarious position when it comes to raising United Kingdom interest rates.

There remain "considerable risks" to the outlook, the minutes said.

The BoE's step toward tighter monetary policy comes as the Federal Reserve is gently increasing short-term interest rates in the United States and the European Central Bank ponders when to round off its multi-trillion euro asset purchase programme amid a buoyant eurozone economy.

"If the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations", the MPC said. But there seems little urgency to tighten, at least outside the small group that favoured a hike.

The U.S. dollar was dragged down against the British pound Tuesday, with sterling hitting its highest level against the greenback this year after a strong United Kingdom inflation report raised the prospects for the Bank of England lifting interest rates sooner than later.

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