Britain’s Pound Topped, Sterling Initially Dipped

Britain’s pound topped $1.34 for the first time in a year on Thursday, after the Bank of England warned it might raise interest rates for the first time in a decade in the “coming months”. 

Sterling initially dipped on the publication of the Bank’s policy decision, as markets reacted to the fact that only two BoE policymakers had voted for an immediate rate hike. There had been some talk beforehand that another rate-setter could shift to that more hawkish camp. 

But it quickly reversed course to turn higher on the day as investors digested the Bank’s statement and brought forward their bets on when the BoE will raise rates. 

On a trade-weighted basis, sterling was on track for its best week in over two years, after a 2.4 percent climb. 

Six-month Sterling Overnight Index Average (SONIA) swap rates, which reflect market expectations for interest rates, hit their highest since June 24, 2016, the day of the Brexit vote result, at 32.20 basis points.

“After recent warnings that markets were under-priced for potential interest rate hikes, the MPC appears close to following through and tightening its policy in response to above-target inflation,” said Timothy Graf, head of macro strategy for EMEA at State Street Global Markets. 

Data earlier this week showed inflation spiked to 2.9 percent in August, its highest level in more than five years and well above the BoE’s 2 percent target. 

But the Bank faces the dilemma of having to balance that with still-weak wage growth, slower economic activity this year and big questions about what Brexit will mean for the economy.