Sterling gains after BoE minutes report hawkish sentiment
Wednesday’s Bank of England minutes demonstrated a hawkish tone with 3 policymakers, reinforcing speculation that the bank will being monetary tightening policy by mid-year. Spencer Dale, the bank's chief economist, joined Andrew Sentance and Martin Weale in voting for a rate rise this month.
The minutes also suggested that some of those opposed to a rate hike this month would consider a rise if the economy shows signs of picking up after unexpectedly contracting at the end of 2010.
Sterling rallied to a three-week high against the dollar and a session peak versus the euro immediately after the minutes, but was unable to add to its upward momentum throughout the day.
The pound has rallied since the start of 2011 as rate rise expectations have gathered steam, but analysts said investors were becoming more hesitant to push sterling higher on concerns monetary tightening could threaten the economy's fragile recovery.
"The simple takeaway of the minutes would be that there's been a move to a more hawkish view on the board given inflation concerns," said Henrik Gullberg, director of currency strategy at Deutsche Bank.
But he added: "Higher rates in the UK, which would be primarily driven not so much by strong demand and activity but by inflationary fears, could be counterproductive in terms of the strength and sustainability of the recovery. This is not necessarily positive for the currency. That's why we haven't seen a stronger reaction from sterling."
Further hawkish sentiment was reflected in UK gilt pricing yesterday as March's FLGH1 future was down 23 ticks.
The dollar remained under pressure on Wednesday as traders kept a watchful eye on developments in the Middle East, where popular unrest now threatens Libya's long term regime. The markets are uncertain about the long-term impact of regime change in Egypt, Tunisia, and potentially Libya and Bahrain. Some traders are putting a premium on safe haven while others are looking to snap up riskier assets, leaving the dollar at risk.
There has also been pressure on the dollar amid expectations for tighter monetary policy outside the US central bankers in the European Union and United Kingdom are seen growing increasingly uncomfortable with soaring commodities prices - oil's charge towards $100 in New York raised speculation that the European central bank is going to raise interest rates sooner than they have been letting on.
Extending a recent upward trend, existing home sales in the US. rose for the third consecutive month in January, according to a report released by the National Association of Realtors on Wednesday. NAR said existing home sales rose 2.7 percent to an annual rate of 5.36 million in January from a downwardly revised 5.22 million in December. Economists had expected sales to slip to 5.25 million from the 5.28 million originally reported for the previous month. With the monthly increase, existing home sales in January were up by 5.3 percent compared to the same month a year ago, reflecting the first year-over-year increase in seven months.
The euro weakened versus the sterling yesterday after hawkish sentiment from the BoE minutes. As a result the single currency dropped 0.5% but managed to close 0.25% up on the day. Continued uncertainty in the Middle East lent volatility to the market, allowing the euro to gain 1% against the dollar.