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Pound Drops As BoE Hold Rates

Pound Drops As BoE Hold Rates

The UK PMI construction index strengthened but still showed severe labour shortages, but price increases and lengthening of supplier delivery times eased off.

The Bank of England held interest rates at 0.1%, disappointing the sizeable majority that expected a rate increase and causing the Pound to weaken across the board. The bank expects inflation to increase further in the near term, peaking near 5% by next Spring. Bank Governor Bailey added that the decision was a very close call, implying that a hike is realistic if jobs data improves.

The guidance that medium-term inflation might drop to 2% also helped to drag Sterling to 1-month lows below 1.3500 to the dollar and the Euro also strengthened to 4-week highs around 1.1680.

Whilst the UK and US are on course to tighten monetary policy, the Eurozone will likely need to increase their current asset purchase programme in 2022 highlighting the divergence in directions. This will give the Dollar and Pound an advantage over time.

Sterling opens just below 1.3500 to the dollar and 1.1680 to the Euro. The main market focus today will be US jobs data, in particular data on wages. Markets will also scrutinise comments from Bank of England speakers today, but especially Chief Economist Huw Pill.


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