Hawkish BoE Encourages Pound Exchange Rate Gains on Prospect of May Rate Hike
In the wake of the Bank of England’s (BoE) March policy announcement the Pound to Euro (GBP/EUR) and Pound to US Dollar (GBP/USD) exchange rates continued to push higher.
Demand for the Pound (GBP) remained solid as the Monetary Policy Committee (MPC) was found to have voted 7-2 in favour of leaving interest rates on hold.
As policymakers Ian McCafferty and Michael Saunders both pushed for an immediate interest rate hike this helped to bolster the odds of the BoE following through with further monetary tightening at its May meeting.
Furthermore, the released meeting minutes noted:
‘There had been few surprises in recent economic data and the February Inflation Report projections, conditioned on a gently rising path of Bank Rate, had appeared broadly on track. The May forecast round would enable the Committee to undertake a fuller assessment of the underlying momentum in the economy, the degree of slack remaining and the extent of domestic inflationary pressures.’
With signs indicating a more hawkish policy outlook for the BoE the appeal of the Pound naturally improved, keeping GBP exchange rates on a generally stronger footing.
GBP Exchange Rates Vulnerable as Brexit-Based Uncertainty Casts Doubt Over UK Outlook
However, the upside potential of the GBP/USD exchange rate was still somewhat limited on Thursday afternoon thanks to a lingering sense of uncertainty over the UK outlook.
Even after the Brexit breakthrough seen at the start of the week, when the UK and EU published a joint draft treaty, several key issues remain unresolved.
Persistent uncertainty over the future of the Irish border, and the fact that no deal will be final until everything is agreed, suggests that Brexit will remain a key headwind for GBP exchange rates in the coming months.
This could discourage the BoE from continuing to pursue a course of tighter monetary policy, given the significant impact that Brexit-based uncertainty could still have on the strength of the domestic economy.
Even though average weekly earnings figures bettered forecast in the three months to January it remains to be seen whether this will actually encourage consumers to start spending more.
Further BoE Comments Forecast to Provoke Pound Exchange Rate Volatility
While the March meeting represents a fairly hawkish hold this may struggle to keep the GBP/EUR exchange rate on a bullish trend over the coming days.
After hitting its highest level since June 2017 the GBP/EUR exchange rate looks vulnerable to some degree of profit-taking, particularly if jitters over Brexit pick up once again.
Fresh commentary from BoE policymakers could offer the Pound an additional boost, however, if their tone proves to be more optimistic in nature.
As long as markets see reason to bet on the prospect of a May interest rate hike the downside potential of GBP exchange rates is forecast to remain somewhat muted.
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