Pound Sterling Strength Worries Bank of England
The Bank of England has attempted to talk down the value of the pound sterling in their July MPC Minutes.
The minutes, released on Wednesday the 22nd, did not however have the desired impact on the pound exchange rate complex.
The pound is notably higher against the euro, US dollar and the full suite of commodity currencies following the release.
Driving exchange rates higher will certainly be concerns that inflation could start rising faster then anticipated - something that could prompt aggressive interest rate rises.
They dynamic for global FX in 2015 remains the same - higher interest rates = higher exchange rates.
The Monetary Policy Committee did take the chance to express concern over the value of the pound sterling exchange rate complex noting it had ‘appreciated markedly’ over the previous twelve months:
“The Committee discussed how to weigh these contrasting movements. The loosening in credit conditions would have supported domestic demand.
“But the appreciation of the exchange rate could have an adverse impact on the balance of growth in the economy and had occurred despite the large current account deficit.”
This concern over the value of the exchange rate was however not sharp enough to prompt a decline in the exchange rate.
Indeed, markets have taken the view that issues such as the prospect of higher inflation in the future is what really matters for the Bank who noted:
“Taken together it was likely that financial conditions were a little looser than a year earlier.”
The outlook for the British pound is bullish following the release of the Minutes.
“The clear divergence from the leading G10 policy makers, particularly from the ECB, BoJ and commodity sensitive BoC, RBA and RBNZ, should keep the appetite in pound tight enough for further appreciation,” says Ipek Ozkardeskaya at London Capital Group.
On trade weighted basis, British pound recovered two thirds since it fell from its 2007 pick, there is 30% more to go before reaching the pre-crisis levels.
