Hawkish BoE Pushes Pound Higher

Pound traders have spent the last few sessions fixated on today’s BoE Super Thursday releases and they have not been disappointed. Whilst the Bank of England voted unanimously to keep interest rates on hold, as expected, the central bank did hint towards possible faster and higher interest rate increases through the year. 

They said rates may need to rise “earlier” and by a “somewhat greater extent” than they thought at their last review in November. Whilst policy makers at the Bank of England are unlikely to be considering 3 or 4 hikes this year, the possibility of two hikes across 2018 appears to be increasing. This brings forward the possibility of interest rates being hiked as early as the Spring with May being the most likely month, then an additional increase potentially in November. 

 The BoE also noted that the global economy was expanding at the fastest pace in seven years and the UK was benefiting from that growth. As a result, the BoE has increased its economic growth forecast to 1.7% this year, from its previous forecast of 1.5%. Furthermore, inflation is expected to remain above target. Whilst domestic inflationary pressure are likely to firm going forwards as wages increase, weak sterling remains the main reason for the high levels of inflation.  

The decision to raise rates is not so straight forward there are several concerns, namely Brexit uncertainties and falling consumer spending. Consumers have reined in their spending as a result of high inflation and lower wages in real terms. An increase in interest rates will push up the cost of borrowing (ie mortgages) and could weigh on consumer spending further. However, the BoE appeared relaxed that spending was not reliant on credit at its current level, so they don’t consider this a major concern, especially given that earnings are forecast to continue rising. 

Market reaction: 

Given that the announcement was even more hawkish than most market participants were anticipating sterling rallied. GBP/USD was trading lower heading into the meeting, struggling to push above $1.39. 

Following Carney’s appearance GBP/USD has shot up 133 points, just shy of 1% as it makes at attempt on the important psychological level of $1.40. A meaningful move through this level at $1.40 could see GBP/USD push higher to near term resistance at $1.4035 before attacking $1.41.  

As the pound has strengthen, the FTSE has come under increased pressure. A stronger pound is less favourable for the international firms that make up 70% of the FTSE. Banks are one of the few sectors to move higher on the FTSE, as they stand to benefit from a higher interest rate environment.