Pound Sterling Bought against Euro and Dollar in Wake of Vlieghe Comments

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A member of the Bank of England's Monetary Policy Committee has given some upbeat comments on the outlook for the UK economy, prompting fresh buying interest in the British Pound.

Sterling rallied against the Euro, Dollar and other major currencies after Gertjan Vlieghe said an early interest rate hike at the Bank of England is possible if there is smooth transition of workers off furlough and into employment.

Vlieghe said in a speech to the University of Bath that he expects the first rate rise to occur "well into next year" as workers coming off the government's furlough scheme might push up unemployment.

But he noted there were upside risks that "should the transition out of furlough happen more smoothly, with the unemployment rate at or a little below current levels by the end of the year, with associated signs of upward inflation and wage pressure beyond the temporary and base effects, then a somewhat earlier rise in Bank Rate would be appropriate."

"Hawkish Vlieghe comments lifting GBP," says Viraj Patel, Global Macro Strategist at Vanda Research.

Vlieghe's comments are significant in that he is considered a 'dovish' member of the MPC, in that he tends to be cautious on raising interests rates and would like to see solid signs that inflation and employment are recovering before raising rates.

The market entered the day pricing in a first interest rate rise in late 2022, however the comments from Vlieghe might prompt this timing to come forward.

This is a typically supportive development for the Pound.

The Pound-to-Euro exchange rate rose 0.40% in the wake of the comments to 1.1623 while the Pound-to-Dollar exchange rate rose by a similar margin to reach 1.4172.

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"The Bank of England’s Gertjan Vlieghe sparked Sterling into life this afternoon, when he hinted that the UK’s central bank might raise interest rates early next year, provided the labour market recovers smoothly. The comments fuelled a gain of 0.4% for the Pound against the Dollar as markets assume a more hawkish BoE moving forward. All eyes will now turn to the planned phase out of the Government’s furlough scheme in September," says Matt Nobes, UK Deputy Head of Trading at Global Reach Group.

Despite the gains the Pound still remains comfortably within its short-term ranges and investors will be looking for some follow-through action over coming days for signs the currency is refinding that form it enjoyed in the first quarter.

"The quid seems to have got rather over-excited about a heavily caveated set of remarks from Vlieghe," says Michael Brown, Senior Market Analyst at CaxtonFX.

Trade in the Pound has been relatively uninspiring of late, but to be fair this has been the case for wider currency market as most major exchange rates have traded tight ranges over recent weeks.

Therefore expecting the Vlieghe comments to deliver sustained gains from here could be considered somewhat optimistic.

"Hawkish, yes, but lots of 'ifs, buts & maybes' in there, plus he more than likely won't be around by the time it comes to tighten anyway," says Brown.

Vlieghe is due to leave the MPC at the end of August and his views will therefore not carry much weight.

Patel says the Pound's advance on the back of Vlieghe's comments might be limited as a BoE rate hike in the second half of 2022 is already largely priced into the market and conditional on smooth exit from furlough.

"But this won't be a linear recovery. Good case for fading some of the optimism in GBP," says Patel.

The government's furlough scheme is due to end in September, at which point economists fear a spike of unemployment might follow as workers find they cannot return to their previous jobs.

The ONS said on May 27 that about 8.0% of the workforce was still furloughed, which is the lowest figure of 2021 so far.

Should this rate continue to fall ahead of September then the Bank of England might grow more confident on the economy's prospects.

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