British Pound Hits Fresh 26 Year High, BoE Comments Hold Key to Further Strength

Interest rate announcements are always important for the foreign exchange market. With the Bank of England, this upcoming rate decision will be market moving regardless of whether they decide to raise interest rates or not. After having raised rates in May and then leaving them unchanged in June, the BoE is expected to lift rates to 5.75 percent tomorrow.

Of the 60 economists surveyed by Bloomberg, 87 percent of them are calling for an interest rate hike. This almost unanimous view puts the “surprise” element of the event risk to the downside. The recent movement of the British Pound indicates that the currency market expects big things from the central bank. The only outcome that they would be satisfied with is a quarter point rate hike by the BoE followed by language that alluded to more rate hikes to come in near term. Anything else, meaning either unchanged rates or a more cautious statement would be a big disappointment that could lead to sharp weakness in the British pound. With the GBP/USD trading above 2.0, there is a decent chance that the central bank will move to a “wait and see” mode after lifting interest rates. Meanwhile despite a drop in consumer confidence, UK data remains strong. Service sector PMI increased from 57.2 to 57.7 in the month of June; the inflation component rose from a 15 month low.