Sterling a little higher on BOE rate hike hopes

Sterling gained some ground Tuesday on investor expectations the BOE will raise UK interest rates this week. The QIR, also due this week, should also give some clues to the outlook further ahead.

Sterling a little higher on BOE rate hike hopes

Sterling has climbed a little higher Tuesday, underpinned by firmer expectations the UK’s Bank of England (BOE) will raise interest rates this week.

The BOE’s quarterly inflation report (QIR), which is due for delivery Thursday too, is also likely to provide some direction to the sterling, US dollar currency pair.

In it, the central bank details it’s revised forecasts for inflation, growth and employment – among other things. All important information for currency investors.

Close to midday Tuesday, sterling was trading at $1.3213. That was little changed from the 0830 BST open in the UK and down from the $1.3221 it reached earlier in the session.

BOE rate expectations

Analysts are broadly anticipating the BOE will raise the UK’s interest rate to 0.50% when it makes its announcement Thursday. That will represent the first rate hike in the UK for just over a decade.

However, while further rate increases are expected, the pace and timing of them is a big unknown. Much depends on the tone of the QIR and how the economy and inflation will respond to Brexit.

While some economists expect higher UK interest rates in 2018, others are less sanguine on that score.

“We believe that any hike in November will reflect a reversal of the post-Brexit stimulus rather than the beginning of a short-term series of hikes,” said Edward Park, Investment Director at Brooks Macdonald.

“Without a material improvement in the consumer backdrop (accounting for c. 60% of the economy) we would expect the Bank of England to pause after November,” Park added.

Brexit headwinds

While investors await Thursday’s rate decision and QIR, a separate news report from the BBC, suggests the BOE is anticipating some 75,000 financial services jobs could be lost in the UK, as a result of Brexit.

A report by BBC economics editor Kamal Ahmed, states he understands that senior BOE figures are using the 75,000 figure, as a “reasonable scenario”.

That number is much higher than the under 10,000 job losses anticipated by a Reuters poll of 100 finance firms.

Brexit-related details such as these will likely imply to investors that Brexit could hit the UK harder than they currently expect. And that could affect investor sentiment and weigh on sterling even further.

As of 11:34 GMT, Tuesday, 31 October, GBP/USD share price is 1.3117.

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