Pound gains after positive meeting

The British pound gained significantly during the day yesterday, reaching above the 1.32 level comfortably against the Dollar.

This was a reaction to the statement after the Bank of England kept interest rates on hold but a vote for a hike by its chief economist heightened expectations that it could tighten policy at its next meeting in August.

Investors had been pessimistic about the chances of the British central bank offering strong guidance about a rate hike soon because of uncertainty over Brexit and the state of the economy.

But the BoE’s Monetary Policy Committee voted 6-3 to keep rates at 0.5 percent, with chief economist Andy Haldane unexpectedly joining those calling for rates to rise to 0.75 percent, citing concerns that recent pay deals could push wages up faster than expected.

Markets now see a 45 percent likelihood of the MPC raising interest rates in August by 25 basis points and a 95 percent chance of one more rate hike by the end of 2018.

Markets had priced in a 38 percent chance of an August hike before Thursday’s vote and will probably want to see a run of decent economic data before raising August expectations much further.

After the vote, short-dated British government bond prices rose sharply while Britain’s top share index turned negative.

Aside from monetary policy, Britain’s expected departure from the European Union in March 2019 continues to weigh on sterling.

Prime Minister Theresa May won a crucial Brexit vote in parliament on Wednesday, averting a rebellion that could have undermined her authority, and briefly boosting the pound.

But traders remain divided as to whether May’s victory will raise her chances of securing a more favourable Brexit deal with the EU given that many more months of negotiations lie ahead.

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