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Sterling jumps to 14 month high after Bank of England hints at rate hike

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15 September 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound leapt to its highest level in fourteen months against the US Dollar on Thursday after a hawkish Bank of England suggested that higher interest rates in the UK were likely in the “coming months”.

here were no surprises in the vote among policymakers with hawks Ian McCafferty and Michael Saunders remaining the two sole dissenters on the committee in favour of an immediate hike. We had speculated that chief economist Andy Haldane may be close to following suit, having claimed in June that he expected to support a rate rise later in 2017.

While the vote remained unchanged Sterling spiked by over one percent after policymakers voiced less tolerance for above target inflation. A “majority” of members judged that some removal of stimulus would be appropriate should they see a “gradual rise in underlying inflationary pressure”. The MPC also noted a stronger economy since the last set of economic forecasts in August, citing signs of a firmer housing market and improved labour situation.

We have been saying for a number of months now that the Bank of England would have no choice but to consider raising interest rates should inflation continue to print around the 3% mark. Yesterday’s communications from the BoE vindicates this view and reinforces our opinion that the possibility of an interest rate hike in the UK before the end of the year remains very much alive. Financial markets are now pricing in around a 65% chance of hike, the highest percentage we’ve seen for a December 2017 rate increase since the Brexit vote.

Sterling is likely to remain well supported today as investors continue to bring forward their expectations for higher rates in the UK. The currency now has in its sights its strongest position since the immediate aftermath of the Brexit vote back in June 2016, having rallied by almost 5% in a mere three weeks.

US inflation jumps ahead of FOMC meeting

A bounce in US inflation yesterday gave the Dollar temporary wind in its sails, although this proved short lived with the currency ending more-or-less unchanged against the Euro. Inflation jumped to a greater-than-expected 1.9% in the US in August from July’s 1.7%, back to just shy of the Fed’s 2% target. This ended five months of misses and should alleviate concerns among the FOMC regarding an entrenched slowdown in consumer prices. While the Federal Reserve is almost certain to leave interest rates unchanged at its meeting next Wednesday, policymakers are likely to acknowledge the improvement in inflationary pressure and keep open the possibility of another rate increase in December.

Away from the US, the Swiss National Bank made a rather significant change to its monetary policy message, altering its view that the Franc was “significantly” to “highly” overvalued. The SNB maintained its existing policy stance and will likely continue to intervene in the FX market order to prevent an appreciation of the currency against the Euro.