Pound Euro + Pound Dollar Exchange Rates Correct Lower as Bank of England Takes Baby-Steps Towards Raising Interest Rates

Today's exchange rate quotes show mixed fortunes for the UK unit following on from the GDP data release which was actually rather cheery:

• The pound euro exchange rate: 0.02 pct lower on a day-to-day basis at 1.2616. This week's high was at 1.2700 and momentum is lower.
• Pound dollar exchange rate: 0.09 pct lower at 1.6971. This week's best level was at 1.7093 and a break below 1.7 will concern GBP bulls.
• Pound Aus dollar rate: 0.05 pct higher at 1.8045. The maximum was seen at 1.8238 on Tuesday.
• Pound NZD rate: 0.29 pct higher at 1.9877. The Bank of New Zealand raised rates today but said this would likely be the last rise, something that has prompted a NZD sell-off.

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Exchange rates, Interest Rate Rises and the Bank of England

One of the fundamental drivers of global currency relationships at the present time remains the differing levels of interest rates at the world's central banks.

The realisation that the BoE is well ahead of its rival central banks in the Eurozone and US is one reason for the rise in GBP/USD and GBP/EUR in 2014.

Today's July MPC minutes were the latest insight into the inner thinking at the Bank as to when rates would rise.

Ben Bennett, Credit Strategist at Legal & General Investment Management, comments on today’s MPC minutes:

“Today’s minutes revealed that no one is voting yet for a rate hike, but the rhetoric continues to point towards what we expect will be the first rate hike by the end of the year.

“Ultimately loose policy from central banks has suppressed fundamental problems represented by the global debt overhang rather than solved them. Bond investors need to be cognisant that a sharp widening of credit spreads seems inevitable at some point, and taking significant risk at current valuations is becoming an increasingly dangerous activity. This may take months, quarters or even years to play out, depending on how central banks keep the liquidity game going. But as market volatility drops and more and more people are sucked into spreads that are grinding ever tighter, the risk of a large spike in spreads grows.”

Boris Schlossberg at BK Asset Management says:

"Indeed we believe that this point is the key to BOE reticence towards any tightening as wage growth remains lackluster. Until and unless wages begin to rise appreciably the BoE is likely to remain stationary for the time being as they perceive no serious threat to inflation.

Cable drifted lower in the aftermath of the release, dropping below the 1.7050 mark as traders were clearly disappointed with lack of hawkishness on the MPC. The pair could now tumble towards the 1.7000 level as the day proceeds."

James Knightley from ING says today's minutes suggest that the MPC is warming up to tighten policy soon:

"The debate on rate hikes is starting to open up, especially with the concluding line stating that while the MPC 'agreed that no increase was warranted at this meeting… for some members the decision had become more balanced in the past few months than earlier in the year'."

"Next month’s MPC meeting coincides with a new set of economic forecasts from the Bank so that could be the catalyst for the first one or two MPC members voting for a rate rise."

"Martin Weale, who voted for a rate rise in the January-July 2011 period, would be amongst the favourites to do so, but we have to remember there has been quite a lot of churn on the committee in recent months so there could be others."

"We also must remember that the minutes to the June meeting stated 'the relatively low probability attached to a Bank Rate increase this year implied by some financial market prices was somewhat surprising'."

"Given we don’t expect any significant loss of momentum for the UK economy over the rest of the year we favour a November rate hike from the BoE with very slow and steady additional tightening of perhaps 25bp per quarter thereafter."