GBPUSD Surges on Hawkish Bank of England

GBPUSD talking points:

- As forecast, the Bank of England has left the UK bank rate at 0.5%, its asset purchase target at £435 billion and its corporate bond target at £10 billion.

- However, a hawkish stance has strengthened the British Pound sharply.

- At his post-meeting press conference, Governor Mark Carney said it is likely to be necessary to raise interest rates somewhat earlier and to a somewhat greater extent than thought previously.

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Pound jumps as BoE takes hawkish stance

GBPUSD rose strongly Thursday after the Bank of England left all its key monetary policy settings unchanged but shifted expectations towards two or even three quarter-point UK interest rate increases this year rather than just one. Following the publication of the bank’s quarterly Inflation Report alongside its rate decision, Governor Mark Carney hinted that a quarter-point hike in UK interest rates is now possible as soon as May.

The bank commented that if the UK economy grows as expected, monetary policy will have to be tightened somewhat earlier and by somewhat more than it was expecting last November. Following his comments, the chances of a May rate increase climbed to 67% judging by market prices.

Meanwhile, the bank nudged up its inflation expectations, based on market interest rates, in one year, two years’ and three years’ time. Inflation could rise back above 3% in the short term, Carney said.

The BoE also lifted its forecasts for UK economic growth – boosted by global growth – despite arguing that Brexit uncertainty is weighing on UK business investment.

In response, GBPUSD rose sharply despite a comment by Carney that any rate increases will be gradual and limited.

GBPUSD Price Chart, Five-Minute Timeframe (February 8, 2018)

Chart by IG

UK government bond prices fell back, with the yield on the benchmark 10-year gilt rising four basis points to 1.592%. EURGBP fell as the Pound strengthened.

--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

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