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British Pound Soars to Near One-Month High on Quarterly Inflation Forecast

British Pound Soars to Near One-Month High on Quarterly Inflation Forecast

2016-11-03 13:35:00
Nick Cawley, Analyst
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Talking Points

- Bank of England holds interest rates steady at record low 0.25%

- BOE says monetary policy could respond “in either direction to changes in the economic outlook”

- BOE raises 2017 growth and inflation forecasts.

The British Pound traded at a near one-month high of GBP/USD $1.2482 after Bank of England Governor Mark Carney and the Monetary Policy Committee kept the Bank Rate unchanged at 0.25%. Likewise, in a hawkish twist, the MPC said that interest rates could move in either direction depending on the economic outlook. But the hawkish hue to the latest Quarterly Inflation Forecast was most evident in its updated growth and inflation forecasts.

The BOE’s new set of growth and inflation outlooks both trumped previous forecasts. The economy is seen expanding by +2.2% in 2016 from a prior expectation of +2%, and by +1.4% in 2017, up from the previous forecast of +0.8%. Governor Carney said that the economy this year was growing faster than expected this year “reflecting the resilience in particular of indicators of household spending and sentiment.”

Chart 1: GBP/USD 5-minute Chart (November 2 to 3 Intraday)

British Pound Soars to Near One-Month High on Quarterly Inflation Forecast

The weak British Pound is seen as the driving force behind renewed forcasts on UK inflation with the central bank now seeing inflation rising above its target of +2% early next year and hitting +2.7% by the end of 2017. The Bank of England said that while it will accept an inflation overshoot in the short-term, “there are limits to the extent to which above-target inflation can be tolerated.” To this extent, markets are quickly adjusting to the reality that the BOE will not be easing policy again anytime further, fuelling the rebound in the Sterling.

Today’s BOE meeting followed the news earlier in the day that the UK government cannot trigger Article 50 Brexit negotiations without Parliamentary approval. The UK government has said that it will appeal the High Court ruling and the Supreme Court has set aside space for a hearing on 7-8 December.

--- Written by Nick Cawley, DailyFX Research

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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