The pound slid from an 11-month high versus the dollar and UK government bonds rallied after the Bank of England voted to keep interest rates unchanged, while also cutting the country’s economic growth forecast.
Sterling dropped to its weakest level versus the euro this year as money markets showed traders pushed back expectations for a rate hike to November 2018 from August 2018 prior to the decision. The BOE’s Monetary Policy Committee voted 6-2 in favor of keeping rates unchanged at a record-low 0.25%. The central bank lowered its economic growth projections to 1.7% this year from 1.9%.
“The drop in sterling may suggest that some investors were betting on a surprise hawkishness from the meeting,” said Credit Agricole SA strategist Valentin Marinov in emailed comments. “The markets will continue to bet on a hike in 2H18, which could leave GBP back at square one.”
The UK currency has rallied since the central bank’s previous meeting in June, when three of the MPC’s members voted in favour of a rate hike. Even so, the economic backdrop is showing signs of deterioration, with growth stuttering and wages struggling to match higher levels of pound-induced inflation. The BOE cut its forecast for wage growth for 2018 and 2019.
The pound earlier climbed to its highest level versus the dollar since September after IHS Markit’s services Purchasing Managers Index, which measures the largest part of the economy, rose to 53.8 last month from 53.4 in June. The gauge was above the key 50 level that divides expansion from contraction and beat analysts’ median forecast of 53.6.
Here’s what strategists said about the market reaction to the BOE:
ING Groep NV
“While the immediate fallout for the pound should be contained given the limited scope for the UK rate curve to flatten further, we continue to see near-term downside risks,” wrote strategist Viraj Patel in a note to clients. “The BOE’s patient policy approach means that GBP can be bucketed into those currencies vulnerable to being sold under the theme of monetary policy divergence.” Expects EUR/GBP to now overshoot their 0.90 forecast for 3Q17 Against the dollar, there’s near-term downside risks below $1.30 but “comfortable” with $1.35 year-end forecast
UBS Wealth Management
“Despite a wobbly performance against the euro, sterling has been on the march against the dollar of late,” wrote economist Dean Turner in emailed comments. “Despite the setback following today’s announcement, we expect this trend to continue, barring any major upsets, political or otherwise.”
BNY Mellon Corp.
“Were EUR/GBP to end the day around current levels, this would put it in (or around) the 2% highest ever closes for the currency pair,” wrote strategist Neil Mellor. “Seldom has the EUR traded above the GBP 0.90 level without its subsequent move proving particularly sharp.”