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Pound Gains Following Interest Rate Sentiment – but Will It Last?

The pound has enjoyed decent gains this week following the latest Bank of England rate decision. Whilst UK interest remained at 0.5% a change of sentiment is clearly changing with 3 monetary policy members voting to raise UK interest rates to 0.75%.

London, United Kingdom

The monetary policy committee vote

The Monetary policy team found themselves with a split vote of 3 in favour of a 0.25% rise and 6 wishing to remain at the 0.5% mark. The much more hawkish tone allowing Pound gains against a basket of currencies.

Whilst the 6-3 vote surprised markets who were anticipating a 7-2 outcome, more startling was Andy Haldane’s vote to increase UK interest rates. Mr Haldane opted to vote against the majority for the first time since 2011. The overall sentiment shows markets that an August UK interest rate rise is far from implausible.

Haldane was joined by Michael Saunders and Ian McCafferty who again voted for interest rates to be increased to 0.75%

Inflation the defining factor

Experts believe the more hawkish outlook from the Monetary policy team is partly due to the small predicted uptick in inflation, due to higher oil prices and the weaker pound.

On Wednesday the Office of National Statistics confirmed that May’s inflation figures had remained at 2.4%.

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The stability in the UK’s inflation, therefore, increasing the outside chances of an August interest rate rise, probability rising from 40% pre and 67% post MPC rate decision.

UK economy and growth

Uncertainty still surrounds the weak UK economy and the risks of Brexit remain. The UK economy is now predicted to grow by 0.4% in the second quarter, although an improvement on the last which registered just 0.1%. Last quarter represented the slowest UK growth for 5 years.

Last quarters UK growth was significantly down due to adverse weather conditions caused by the’ Beast of the east’ in turn household spending dropped as consumers were unable to leave their homes. This quarter is predicted to be better, the Bank of England anticipates seeing a lift in this area of the economy.

This week’s pound gains

Whilst Pound Gains have been few and far between, predominantly due to the back and forth nature of Brexit negotiations. The undervalued Pound enjoyed a solid rally following the split Interest rate bank decision. Sterling enjoyed gains against the Euro and Dollar.

Pound gains vs the Euro saw the currency pair touch 1.1453 however the Pound has softened since the decision as profits were presumably taken.

GBP/EUR exchange rates chart on June 27 2018

The pair closed at 1.1378 as markets such on Friday. Sterling regrettably showing less resistance as the Brexit soap opera continues.

Pound gains against the dollar

The Pound also enjoyed traction against the Dollar with the GBP-USD touching 1.3308 on Friday, unlike the GBP- EUR the GBP-USD pair has been able to hold on to the majority of its gains. The pair closing Fridays treading session at 1.3264.

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GBP/USD exchange rates chart on June 27 2018

The Pound gains and the sustainability of the gain shouldn’t be accredited to the Pound. The Dollar has struggled due to continual tension between Donald Trump and the USA’s key trade partners. Safe havens such as the Swiss Franc, Japanese Yen and Euro all benefitting from the impact of the USA going ahead with tariff increases. Whilst US consumer confidence is anticipated to slow due to the uncertainty caused by recent policies including immigration and the tariffs.

Will the pound’s gains continue?

The Pound gained ground against many currencies following the increased appetite for an interest rate rise by the 3 MPC members. Whilst experts believe that the decision far from signals a crossroads for sterling, MOPC members are clearly looking to raise interest rates sooner rather than later.

If as predicted by the bank the economy improves and data supports the more upbeat outlook the pound could well see more gains in the coming weeks.

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