How Tight Is The Cable?

Bank of England (BOE) Decision Props Up Pound

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The decision by the Bank of England (BOE) to maintain interest rates at their current level of 0.25% was expected. However, the Monetary Policy Committee (MPC) decision was not unanimous, and that surprised binary options currency traders. The 8-member MPC voted 5-3 in favour of maintaining the record-low bank rate at 0.25%. The GBP/USD pair rallied on the news, because it shows that the Bank of England Governor Mark Carney and the MPC are inching ever closer towards a rate hike.

An interest rate hike has a positive impact on the GBP, since it will increase the interest paid on the currency, and lure foreign capital back to the UK. As such, currency traders tend to sell JPY, EUR, USD etc. and buy the GBP. Currency trading activity is speculative and does not always hinge on absolutes. Sentiment is leaning towards a rate hike and this has buoyed pound bulls who are now unwinding short positions on the GBP/USD pair. Consider that most economists and currency traders were expecting near unanimity in the MPC vote. That didn’t happen.

UK Inflation Expectations Exceeded

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The Bank of England set a 2% inflation target, much like the Fed. However, inflation has been steadily rising well above the 2% rate and was last measured at 2.9% in May. This means that UK prices are rising sharply, and the economy could overheat in the absence of a rate hike. Analysts attribute the sharp rise in UK inflation to the volatility swirling around the Brexit decision on June 23, 2016, and more recently the surprise UK general election results.

GBP weakness has made imports costlier, and this filters through to Main Street. On Thursday, 15 June 2017, the GBP gained ground against the greenback, the EUR and the JPY. Expectations of an imminent rate hike are driving sterling bulls. The dissenting members of the monetary policy committee include Michael Saunders, Kristin Forbes, and Ian McCafferty. These MPC members have been pushing for a rate hike of 25-basis points towards 0.50%.

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