Although the Bank of England’s (BoE) September policy meeting ultimately proved less eventful than markets had hoped the GBP EUR exchange rate still strengthened significantly.
The Pound surged higher across the board in response to the more hawkish tone of the meeting minutes, which stated:
‘All MPC members continue to judge that, 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.
‘A majority of MPC members judge that, if the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.’
This seems to pave the way for the central bank to begin tightening monetary policy sooner rather than later, even though there was no shift in the voting pattern of the Monetary Policy Committee (MPC) on this occasion.
There had been some speculation amongst investors that BoE Chief Economist Andy Haldane could break ranks and vote in favour of an immediate rate hike, but this ultimately failed to materialise.
As a result the MPC remained split 2-7 in favour of leaving interest rates on hold once again, although this was not enough to prevent Sterling going on a bullish run.
GBP Gains May Fade on Weaker Domestic Data
The Pound’s excited initial reaction to the BoE minutes is unlikely to be sustained for long, given that the Bank has continued to emphasise a gradual process of tightening.
Even though the minutes certainly seem to suggest that the BoE is moving closer to an interest rate hike the chances of such a move coming before the end of the year remain questionable.
While markets have been moving quickly to price in higher odds of a November or December rate hike, though, this optimism may prove to be relatively short-lived.
Unless UK data continues to surprise to the upside in the coming weeks this could rapidly undermine the case for any imminent tightening action.
Any disappointment from upcoming UK retail sales and public sector net borrowing figures may return the GBP EUR exchange rate to a downtrend, suggesting that the economy is not holding up as well as hoped.
However, if the finalised second quarter gross domestic product confirms that growth strengthened to 0.3% on the quarter this could bolster the case for policymakers to take a more optimistic view.
So long as domestic economic growth continues to rebound in the third quarter then bets on the prospect of an imminent BoE rate hike are still likely to drive the GBP EUR exchange rate further away from its recent lows.
Persistent Brexit Worries Could Discourage BoE Action
With Theresa May due to give a fresh speech on Brexit next Friday the Pound could well come under renewed pressure.
Jitters over the state of Brexit negotiations and the government’s approach to the matter remain a significant headwind for GBP exchange rates.
Unless May shows signs of softening her approach towards Brexit in either this speech or her appearance at the Conservative Party Conference then Sterling is likely to soften against its rivals.
If the UK looks to be heading towards a hard exit from the EU this could give the BoE cause for pause, denting the likelihood of any rate hike with a resurgence in economic uncertainty.