The Bank of England’s recent rate hike is reverberating in the market, with the pound holding steady just above a five-week low. Traders are carefully analyzing the 25 basis point increase and its potential impact, while also eagerly awaiting the release of key U.S. jobs data.
The Bank of England’s Monetary Policy Committee lifted rates by 50 basis points in June, and followed up with a 25 bps hike to 5.25% on Thursday. The decision was driven by concerns over high inflation, leading the committee to suggest that rates would remain elevated for the foreseeable future. BNP Paribas analysts interpreted these actions as a signal of the end of the tightening cycle, highlighting a shift in focus from the level to the duration of restrictive rates.
The reaction from the pound has been relatively muted, remaining flat against the dollar at $1.27065, just below its previous close on Wednesday. Analysts from BNP Paribas believe that this lack of significant movement could be attributed to the pound already having weakened in recent weeks due to reassessed expectations of a Bank of England rate increase. However, they caution that this stability may not last, and anticipate possible resumed weakness in the pound.
There are two potential scenarios that BNP Paribas analysts foresee. First, the Bank of England may pause or hike rates just once more, which would necessitate further adjustments downward for both rates and the pound. Second, if a more aggressive tightening of monetary policy is deemed necessary, it could result in a greater impact on the British economy, further weighing on the value of the pound.
Despite the pound’s recent stability, market conditions could change following the release of the U.S. non-farm payroll data later in the day. Analysts predict that if the jobs data falls below expectations, there is a risk of the dollar, and therefore the pound, weakening. Conversely, if the data exceeds expectations, it could potentially strengthen the dollar against the pound.
In the first half of the year, the pound showcased strong performance against the dollar, emerging as the best-performing major developed-market currency. The pound reached a high of $1.3144 in mid-July when projections for peak Bank of England rates were hovering above 6%.
Against the euro, the pound demonstrated stability, with one euro valued at 86.11 pence, positioned within its recent trading range.
The Bank of England’s rate hike and the upcoming U.S. jobs data have set the stage for potential shifts in the currency markets. Traders and analysts are closely monitoring developments, eager to gain insight into the future trajectory of both the pound and the dollar. As market conditions evolve, investors will navigate these choppy waters by interpreting the data and adjusting their strategies accordingly.
