Pound-to-Dollar: Sterling Rises On Fed Uncertainty But The BoE Is Now In View
- Written by: James Skinner
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The Bank of England rate-debate is hotting up with rain-makers betting on a cut before the year is out, while strategists and economists see a hike.
The Pound-to-US-Dollar rate was driven higher Thursday by an increasingly murky outlook for Federal Reserve monetary policy but recent events mean it could go higher yet if the Bank of England adopts a more hawkish tone in its September policy statement.
An early shakeup of the Fed board brought about by the Wednesday resignation of Stanley Fischer and a Washington deal to kick the debt ceiling debacle into the long grass of December have left markets betting the Fed sits on hold through the rest of the year.
The Pound-to-US-Dollar rate has risen by 150 points, to 1.3088, since news of the two events first hit the market but the British Pound’s recent weakness against the Euro and the Dollar is pushing UK inflation higher and might mean policy makers soon begin to sound more hawkish, according to Capital Economics.
“The downward shift in markets’ interest rate expectations and the implied probability of a nearterm hike since August’s Inflation Report is quite striking,” says Paul Hollingsworth, a UK economist at London headquartered consultancy, Capital Economics, in a recent note.
Hollingsworth says the Monetary Policy Committee is unlikely to spring any surprises on the market on September 14 but that the minutes might reveal a more hawkish sentiment among rate setters.
“It wasn’t all that long ago that the implied probability of a rate hike before the end of the year was close to 60% – it’s now currently just shy of 25%,” Hollingsworth says.
GBP/USD exchange rate shown at hourly intervals. Source: Netdania.
Expectations around the Bank of England’s next likely move are constantly evolving. Some economists have recently argued that markets should expect a rate hike from the MPC while others are actively betting that the central bank will have to cut rates again before the year is out.
“We see a cut in Bank Rate to 0.10% and more QE in late 2017, despite the overshooting inflation,” says John Wraith, a rates strategist at UBS.
Wraith has spent the year advocating that clients enter swaps trades that will pay out if 30 Yr UK government bond prices outperform relative to their German and US counterparts, a speculative bet that will have paid dividends.
GBP/USD exchange rate shown at 8 hour intervals. Source: Netdania.
This is while some economists have more recently begun to call for the Bank of England to begin normalising its monetary policy.
“Brexit is not enough to keep rates on hold,” wrote Berenberg economist Kallum Pickering, in a note last week. “We look for a first rate hike in November 2017.”
Pickering argues that the Bank of England’s post-crisis monetary policies have done all they can do and that the central bank should not be expected to attempt to fix structural problems with the economy using monetary policy. Structural problems, such as low productivity, are the domain of government policy.
Capital Economics’ Hollingsworth flagged Thursday that the Bank of England has previously warned rates could go up faster than the market expects if the UK’s economy performance during the summer onward pans out as it had forecast.
“The economy has performed broadly in line with its expectations. Moreover, the pound has fallen further since the Inflation Report, which will put more upward pressure on inflation,” Hollingsworth says.