Where now for the pound?

The Bank of England finally hiked rates last week, for the first time in ten years, but is this the beginning of something more, or just a one-off?

Bank of England
Source: Bloomberg

At last, the so-called ‘unreliable boyfriend’ delivered. After dropping none-too-subtle hints about a coming rate rise in September, prompting a bounce in the pound and a drop for the FTSE 100, the Bank of England (BoE) blew the dust off the button marked ‘increase interest rate’ and pressed it. The result was not, perhaps, what many had expected. The pound fell, and the FTSE 100 surged.

The reasons were not hard to divine. The rate increase itself was ‘old news’, having essentially been factored in over the preceding weeks. The key driver in the fall of the pound was that the bank does not think further increases are justified. Of course, no one from the bank is prepared to say so in quite such bald terms, but the references to Brexit (conveying as they do warnings about the uncertainty of the economic outlook) reinforce the idea of a Monetary Policy Committee (MPC) that is none-too-keen on raising rates again in the near future.

Markets are, of course, forward looking. The fall in the trade-weighted pound following the rise in official interest rates confirms what investors expect, namely no change in UK monetary policy for the time being. This comes at a time when the US continues to raise interest rates, and set against this guardedly hawkish policy, the BoE’s tentative steps towards tighter policy are meagre by comparison.

This move in policy does come at a time when the UK’s economy is moving in the right direction. The crucial services Purchasing Managers Index (PMI) has begun to move higher, remaining above the 50 mid-point. Worries about consumer spending continue to provide reason for caution, but overall the economy does not need to remain forever on an emergency setting. But higher rates would seem to be unnecessary at this point, raising the risk of higher repayments on mortgages and other borrowing, which would put yet more pressure on consumers.

In sum, we see little change in UK monetary policy for the time being. Brexit trade talks should start in December, according to the existing timetable, but recent noises from the EU suggest otherwise. While oil’s rise will boost inflation, there is still the worry about weaker consumer spending. It will be difficult for Mark Carney and his band to justify any further rate increases in 2018.

The 2017 uptrend in GBP/USD looks to be under threat, thanks to the recent losses. We have seen the price create a new higher high in the trend in September, but should further downside persist then the August low at $1.2790 comes into play. If this is lost, then it appears the downtrend from the 2014 high has reasserted itself. A close above $1.35 is needed to reverse the current bearish outlook on the weekly timeframe. 

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