Today sees the most eagerly awaited interest rate decision from the Bank of England which could see the first interest rate increase in a decade.
The Bank of England’s announcement has the potential to create substantial volatility for Sterling exchange rates depending on whether there is a rate hike or not. The Pound has seen an excellent rally over the last two months as key members from the central bank have signalled the requirement to raise interest rates to tackle inflation.
Positive UK economic data in the build up to the decision
UK Manufacturing data from yesterday as per the Purchasing Managers Index (PMI) data arrived better than expected which has also helped boost Sterling and when considered with the stronger UK Gross Domestic Product (GDP) numbers from last week the data could persuade some members to vote for a rate hike today.
Is an interest rate rise already priced in
The markets have almost entirely priced in a rate hike today which is why Sterling has seen a good week. Rates for GBP/EUR have broken over 1.14 whilst GBP/USD exchange rates have just slipped below 1.33. However, it is important to note that at the last meeting there were only two members who sit on the Monetary Policy Committee that voted for a rate hike. The risk for those looking to buy foreign currencies with Pounds is that if the central bank chooses not to raise rates today then the Pound could see a dramatic fall. Governor of the Bank of England Mark Carney has let the markets down previously when he has hinted at an interest rate hike but then changed tact at the next meeting and did not deliver on that hike.
Whether there is a hike or not the markets will be especially interested in Mark Carney’s statement shortly after the announcement which should give more clues as to what the central bank is thinking and should give new direction for the Pound.