British pound exchange rate complex boosted as UK economic growth forecasts upgraded at Bank of England

By Rob Samson

Sterling saw broad gains Wednesday morning following the Bank of England’s quarterly inflation report which provided updates on the bank’s forecasts for growth and inflation.

Further future guidance on monetary policy first introduced in August last year. By all accounts the pricing in of an interest rate hike to 0.7 pct in the first half of next year looks to be correct.

A look at the latest pound sterling exchange rates shows:

• The pound euro exchange rate is trading 0.9 pct higher than seen at last night's close at 1.2172.
• The pound dollar exchange rate is trading 0.5 pct higher at 1.6533.
• The pound Australian dollar exchange rate is 0.37 pct higher at 1.8273.
• The pound New Zealand dollar exchange rate is 0.25 pct higher at 1.9822.

Note: All FX quotes here refer to the wholesale spot market. Your bank will charge a spread at their discretion when passing on a retail rate. However, an independent FX provider is so well placed on the market that they are able to deliver you up to 5% more currency. Please learn more here.

Improving sentiment towards the pound sterling was an upgrade to the Bank of England's growth forecasts by a fairly large margin from its November report.

2014 growth is now expected to be 3.4% versus 2.8% in November.

2015 and 2016 were also revised higher to 2.7% and 2.8% respectively.

"This is certainly the most positive we’ve seen the Bank of England in several years and whilst it maintained its cautiousness due to ‘headwinds’ the economy faces and said it wasn’t complacent about the recovery, this will further boost the confidence that we are finally in recovery mode," says Andy Scott at HiFX.

On inflation and interest rates, the Bank of England cited some of the factors that had recently brought inflation in line with its target and that are expected to keep inflation in check over the next two years.

"However, it signalled that the current market pricing of an interest rate rise around the second quarter of 2015 was probably appropriate. Previously when it spoke about future market pricing of rate hikes in 2015 it had said it was unwarranted, but it made no such comment this time around. BoE amended its forward guidance as expected to a broader set of economic indicators in particular the spare capacity in the economy and the labour market that will be a factor in any rate hike decision," says Scott.

It maintained its stance that rate increases would be gradual.

Impact on British pound exchange rate complex

Such a positive outlook for the economy resulted in sterling strengthening by 1 cent against the dollar to 1.6550 and by over 0.5% against the euro to 1.2130.

Scott says:

"Despite the BoE commenting on the 10% appreciation seen in sterling against a number of its major counterparts since March last year, it made no specific comments on the central bank wishing to see it weaker

"Whilst the central bank’s forecasts could unwind in the months ahead (it has not been the most accurate in recent years) there’s momentum in the economy and more people in employment than for a number of years.

"If current market pricing of rate hikes is accurate, this will continue to support sterling going forward, particularly against the euro where they’re more likely to cut interest rates in the next 18 months; growth, even in Germany, is only forecast to be 1.8% this year.”