Pound Sterling hit its best levels against a number of G10 currencies after the Bank of England votes unanimously to keep interest rates unchanged and upgrade their growth forecasts.
- Pound to Euro exchange rate today (article last updated on 4-11-16): 1.1233, day's best rate: 1.1251
- Pound to Dollar exchange rate today: 1.2465, day's best rate: 1.2482
- Euro to Pound Sterling exchange rate today: 0.8902, day's best rate: 0.8916
Pound Sterling charged higher as soon as the news was announced that the Bank of England's Monetary Policy Committee had voted unanimously to keep interest rates unchanged at 0.25%.
There were some expectations for a split in the vote and the outcome betrays a Bank whose next move may actually be to raise interest rates.
This is positive for the Pound as it hints at greater capital inflows into the UK from foreign investors seeking yield.
Also helping Sterling was the upgrade to growth forecasts in the Inflation Report.
Raising its growth forecast for 2017 to 1.4% from 0.8% makes this a record upward revision to a growth forecast.
The Bank of England conceded a massive miss on their previous GDP forecasts owing to them being too pessimistic on the outlook for the UK economy following the Brexit vote.
Of note, the consumer confidence of the UK consumer surprised the Bank as, “households look entirely through Brexit uncertainty.”
Governor Carney says business investment has been better than the Bank had initially forecast.
Inflation forecasts are lifted to 2.75 from 2% in 2017 and to 2.7% from 2.4% in 2018 thanks almost exclusively to the fall in value of Sterling.
The fall in Sterling will have more significant implications for monetary policy as it raises inflation forecasts over the next three years.
With inflation clearly heading above the mandated 2% we could expect an interest rate rise in coming years, but not too soon as Carney says the impact of the weaker exchange rate should be temporary in nature.
The irony though is that because Carney speaks about higher inflation so the Pound rises. This in turn lowers prospects for inflation down the road, the question is how much further can Sterling recover?
We hear from one leading technical analyst that the current move higher in Sterling should still only be viewed as corrective, and not the beginning of a recovery.
"GBP/USD has taken out the 5 month downtrend at 1.2341. The market has already virtually reached the 1.2500 psychological resistance and it is interesting to note that all the daily and intraday charts continue to indicate that this move higher is corrective only and should fail here," says technical strategist Karen Jones at Commerzbank.
However, Analyst Kathleen Brooks at City Index sees the scope for further gains:
"We could see the Pound break back above 1.25 on the back of this, and open the way to a higher range for cable between 1.25 and 1.30, at least until the December court ruling on Article 50."
Against the Euro, Jones says we could expect further Pound strength to push EUR/GBP lower:
"EUR/GBP has eroded the 5 month uptrend, and has sold off to the 50% retracement of the most recent leg higher (at .8868). The break of the uptrend has neutralised the immediate outlook as the near term risk has shifted to the downside and we would allow for some slippage towards the 0.8724 August high and the 55 day ma at .8718 and we look for this to hold."
From a GBP into EUR perspective this suggests some gains towards resistance at 1.1462.
Analyst Reactions: Bank Done with Cutting
Paul Hollingsworth at Capital Economics:
"The upshot is that the stronger outlook for the economy than previously anticipated means that another rate cut now looks unlikely. Indeed, we think that the economy will continue to surprise the MPC on the upside over the next few years and, as such, we think that the next move in interest rates will be up."
Johnny Bo Jakobsen at Nordea Markets:
"Overall, today’s news reinforced our baseline forecast for the BoE, which sees no more rate cuts over the forecast horizon. However, we continue to believe that risks are tilted towards further monetary policy easing in 2017 as growth is still forecast to slow substantially."
"Today’s policy announcement and updated Inflation Report projections are notable in two other ways.
"For one, the MPC has again not indicated any increased coordination with fiscal policy.
While the fiscal framework from the March Budget has been publicly dispensed with by the Chancellor, the MPC’s projections still use the March Budget fiscal assumptions, which envisage a relatively restrictive fiscal headwind.
"That creates some scope for a positive economic surprise once they are finally updated – if indeed any meaningful fiscal stimulus is adopted at the Autumn Statement on 23 November.
"Second, the MPC’s updated projections show the largest overshoot of inflation relative to target on record.
"On past form the Committee will look through this expected upsurge in inflation – or, on our expectations, potentially an even bigger one than on today’s projections – and today Governor Carney explicitly signalled that the MPC will not try to offset the rise with tighter policy.
"Yet this will only remain true if second-round effects on wages and inflation expectations remain limited.
"Should the post-referendum slowing in demand prove to be even more modest than the MPC now expect, concern about the upcoming surge in inflation will become more valid."
Strong Services PMI Get Sterling Rally Oiled
Sterling is seen adding to the morning's gains that came on the release of better-than-forecast Services PMI data at 09:30 which suggests UK economic growth this quarter is easily outstripping analyst expectations at 0.5%.
"Today’s UK Markit/CIPS report on services suggests Q4 has got off to a good start and is probably the final blow for a rate cut at today’s Monetary Policy Committee’s meeting. The rise in the main activity balance of the services survey, from 52.6 to 54.5, was well above the consensus forecast of 52.5 and was the highest since January," says Ruth Gregory at Capital Economics.
The rally was also given fresh impetus by news the UK Government was defeated in the High Court over its ability to trigger Article 50.
The news boosted Sterling which likes the idea of Parliament having more say in the EU exit process. However, we believe the ruling only invites further uncertainty and would expect the boost provided by the ruling to be short-negligible.
Nevertheless, the door is now open to more Brexit-orientated volatility.
Mark Carney forms the centre of attention for the second time this week when he hosts a press conference at 12:30.
Markets had expected the BoE to keep the Bank Rate at 0.25%, the government bond purchases target at GBP435bn, and the corporate bond target at GBP10bn.
Most analysts are no change to policy owing to the recent outperformance in UK economic data, but guidance will be key.
Are there more interest rate cuts in the future, or will the next move actually be to raise interest rates to defend Sterling and stave off higher inflation?