Even though the Bank of England raised rates to 5.50 percent, the British pound tanked. Unfortunately the tone of the central bank was less hawkish than most traders were anticipating.
With the futures curve pricing in 6.00 percent interest rates by the end of the year, traders were really looking for comments alluding to another rate hike in June. Not only did King fail to comment on future policy actions however, he also downplayed the level of consumer prices by saying that he expects consumer price inflation to fall back to 2 percent this year. With the GBP/USD trading not far from 2.00 at the beginning of the London trading session, the central bank probably did not want to do anything that would drive further strength in the currency. Raising interest rates at a time when the pound is so strong could dampen economic growth going forward. According to this morning’s report, the March trade deficit hit the highest level in 10 months and we are sure that the strength of the currency is to blame. Meanwhile industrial production also fell short of expectations. Prime Minister Tony Blair announced today that he will be stepping down on June 27. For more on the impact of this, read our outlook on Blair’s Resignation.