GBP/USD – Pound Jumps Above 1.34 as BoE Hints at Rate Hike

The British pound has surged in the Thursday session. In North American trade, GBP/USD is trading at 1.3393, up 1.40% on the day. On the release front, the Bank of England held the benchmark rate at 0.25%, but hinted at a rate hike before the end of the year. In the U.S., CPI and Core CPI both improved in August. CPI gained 0.4%, edging above the forecast of 0.3%. Core CPI gained 0.2%, matching the forecast. There was more good news from the labor market, as unemployment claims fell to 284 thousand, well below the forecast of 303 thousand.  

As expected, Mark Carney & Co. opted to hold interest rates at 0.25%, where they have been pegged since August 2016. There have been calls for the BoE to raise rates in order to fend off high inflation levels, but most policymakers are of the opinion that current economic conditions do not warrant a rate hike. However, what surprised the markets was the minutes of the September rate decision, in which the BoE said that if current economic conditions continue, then “withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target”. The strong guidance from the BoE was unusual, and set the stage for a likely rate hike in November, when the BoE holds its next policy meeting. Investors reacted positively to the hawkish message from the bank, sending the pound sharply higher. At the same time, Monetary Policy Committee (MPC) members have remained consistent in their views on interest rate hikes – seven members voted to hold rates, with two members favoring a rate hike. This outcome was identical to the market forecast of the MPC interest rate vote.

Earlier in the year, the Federal Reserve was full of optimism that a strong US economy would warrant three rate hikes during in 2017. Fast forward to September – the economy has generally performed well, but the US continues to grapple with weak inflation levels. A strong labor market has not helped push inflation higher, as wage growth remains soft. Fed policymakers have retreated from their earlier optimistic forecasts, and have been counseling caution and patience regarding rate increases. As for a December hike, the odds have been below 50% for months. Currently, the odds are pegged at 46%, which is an improvement from last week. However, the positive August CPI data could be a sign that at long last, inflation is moving in the right direction. If the markets feel this is the case, the odds of a December hike should increase.

GBP Soars on BoE Rate Hike Admission

GBP/USD Fundamentals

Thursday (September 14)

• 7:00 BoE Official Bank Rate Votes. Estimate 2-0-7. Actual 2-0-7
• 7:00 BoE Monetary Policy Summary
• 7:00 BoE Official Bank Rate. Estimate 0.25%. Actual 0.25%. Actual 0.25%
•  7:00 BoE Asset Purchase Facility. Estimate 435B. Actual 435B
•  7:00 BoE Asset Purchase Facility Votes. Estimate 0-0-9. Actual 0-0-9
• 8:30 US CPI. Estimate 0.3%. Actual 0.4%
• 8:30 US Core CPI. Estimate 0.2%. Actual 0.2%
• 8:30 US Unemployment Claims. Estimate 303K. Actual 284K
• 10:30 US Natural Gas Storage. Estimate 80B. Actual 91B

Friday (September 15)

• 8:30 US Core Retail Sales. Estimate 0.5%
• 8:30 US Retail Sales. Estimate 0.1%
• 8:30 US Empire State Manufacturing Index. Estimate 18.2
• 10:00 US Preliminary UoM Consumer Sentiment. Estimate 95.1

*All release times are GMT

*Key events are in bold

GBP/USD for Thursday, September 14, 2017

GBP/USD September 14 at 12:10 EDT

Open: 1.3208 High: 1.3404 Low: 1.3148 Close: 1.3393

GBP/USD Technical

• GBP/USD was flat in the Asian session. The pair posted sharp gains in European trade and continues to move higher in the North American session
• 1.3347 has switched to a support role following strong gains by GBP/USD
• 1.3444 is providing resistance

Further levels in both directions:

• Below: 1.3347, 1.3267 and 1.3159
• Above: 1.3444, 1.3514 and 13667
• Current range: 1.3347 to 1.3444

OANDA’s Open Positions Ratio

GBP/USD ratio is showing sharp gains in short positions, consistent with strong gains by GBP/USD. Currently, short positions have a majority (58%), indicative of trader bias towards GBP/USD reversing directions and moving lower.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.