The Monetary Policy Committee of the Bank of England will make its latest statement over interest rates this afternoon. Although headline rates are expected to remain unchanged until after the Brexit saga has been resolved, upbeat economic data including high employment levels do support an increasingly hawkish view for the inflation outlook. If anything, this afternoon should provide a better understanding of how the BoE will manage the balance between building inflationary pressures and perceived political uncertainty.
The Federal Reserve has held fast to its independence and ignored Donald Trump’s suggestion of a 1.0% cut in borrowing costs. In the end, the meeting resulted in little besides a technical adjustment to the rate of interest paid to banks on excess reserve capital. The US Dollar found some strength as a result, but upside has been limited given that a China trade deal is expected to be finalised as soon as next week.
The Pound pushed out to two-week highs against the US Dollar during yesterday’s session amid hopes that a Brexit compromise could be reached. The Fed standing pat resulted in the unwinding of Dollar shorts and caused a rise in GBP/USD.
With many European markets closed for a public holiday yesterday, some of the drift higher for the Euro against the US Dollar may have been attributed to thinner volumes. Tomorrow’s Eurozone inflation reading is now very much in focus.
The Pound pushed out to levels not seen in almost four weeks yesterday as a result of mounting confidence that a Brexit solution can be found. Today’s Bank of England policy statement has the potential to deliver further gains, even if there’s only a moderately hawkish bias on offer.