BoE Leaves Interest Rates Unchanged – May Rate Hike Hopes Propel the Pound US Dollar Exchange Rate

Update: BoE McCafferty and Saunders Push for Rate Hike – Pound US Dollar Exchange Rate Climbs

The Bank of England (BoE) voted 7-2 to keep interest rates on hold on Thursday, but the push-back from Policymakers Ian McCafferty and Michael Saunders and overall optimism in the accompanying statement has paved the way for a rate hike from the central bank in May.

The minutes noted policymaker assertions that slack was ‘largely used up’ and that pay growth was accelerating, presenting significant upside risks to inflation in the medium term.

Ed Monk, Associate Director for Personal Investing at Fidelity International argued that this was a clear cut sign that borrowers should prepare for a rate hike in May, stating:

‘The message from the Bank of England to borrowers couldn’t really be clearer: get ready for higher rates now. Two members voted for a rate rise this month and the Bank said nothing to dispel expectations that rates will rise in May’.

This news quickly gave Sterling a boost against the US Dollar.

Markets Prepare for the Imminent BoE Rate Decision – What can we expect for the GBP/USD Exchange Rate?

Sterling traded higher against the US Dollar on Thursday morning, unperturbed by news that the US Federal Reserve raised its baseline interest rate on Wednesday, and supported by hawkish optimism for the Bank of England’s (BoE) imminent rate decision.

Whilst markets are not expecting the central bank to raise interest rates at this meeting, yesterday’s rather upbeat UK wage growth and unemployment readings have led many to posit that the Monetary Policy Committee (MPC) will lay the groundwork for a rate hike in May.

In this respect, the accompanying statement and press conference from the central bank will likely take centre stage, with comments from Governor Mark Carney, liable to make or break Sterling’s lead.

Indeed, Reuters currently ranks 6 out of 9 MPC members as hawkish, with the other 3 regarded as centrist; an extremely hawkish disparity, and a clear reflection of the current sentiment of the bank.

If Carney and other policymakers are gung-ho about the UK economy in their forward guidance then the Pound US Dollar (GBP/USD) exchange rate could extend its lead.

US Federal Reserve Raises the Bank Rate: Why has the US Dollar (USD) Failed to Capitalise?

Markets had been waiting with bated breath for a rate hike from the US Federal Open Market Committee (FOMC) yesterday – and the bank did do as expected – but instead of rallying the US Dollar (USD) fell even further.

This can be attributed to a number of variables, with the most widely-reported being bank Chairman Jerome Powell’s refusal to outline four rate hikes this year.

With markets already having priced in a rate hike from the central bank the focus was on the forward guidance, and with it proving less hawkish than expected, the ‘Greenback’ quickly encountered pressure.

Beyond this, markets are currently slightly concerned with a massive range of uncertainties, beginning with reports that the US President is set to announce a round of protective tariffs against China on Friday, news that Congressional Republican leaders have released a $1.3 trillion spending bill just 52 hours before the deadline for governmental shutdown, and finally, China’s plan to unveil its new gold-backed Yuan oil contracts next week – the ‘Petro-Yuan’ – which could pose a massive threat to the US Dollar and its dominance in the global oil trade.

Furthermore, many US corporations are concerned with the prospect of paying higher interest rates on loans as well as having to contend with a possible stock market correction – an eventuality that seems to limit demand for the ‘Greenback’ whenever hawkish monetary policy measures are even mentioned.

Pound US Dollar (GBP/USD) Exchange Rate Forecast: EU Brexit Summit Ahead

Tomorrow will feature the EU’s highly-anticipated Brexit summit, with member states expected to agree on the terms of a transition period for the UK.

The final draft of the EU’s guidelines now calls for ‘intensified efforts’, however, pointing out the now familiar adage that ‘nothing is agreed until everything is agreed’.

This is significant in that impasses remain, with no conclusion yet reached regarding the Irish border – a realm of negotiations that UK Prime Minister Theresa May will have to iron out in the next three months.

Ultimately, however, the outlook is rather positive, with Donald Tusk, President of the European Council giving his own seal of approval to member states, saying:

‘I have just recommended to our leaders that we welcome in principle the agreement on transition’.

In this respect, markets currently expect Sterling to rise on the summit, but a rejection of the transition period could still potentially hurt the GBP/USD exchange rate.

Josh Ferry Woodard

After leaving university in 2011 Josh briefly worked as a currency analyst in the South West of Cornwall. Josh continued monitoring the currency markets and publishing exchange rate analysis after moving to London in 2012, with a particular focus on the impact of economic and political stimuli on forex. Josh was a regular contributor to The Telegraph’s weekly currency feature for several years.

Contact Josh Ferry Woodard