Pound weakens despite upbeat BoE Vlieghe outlook on interest rates

Optimistic comments from a Bank of England (BoE) policymaker were insufficient to give the pound a boost yesterday.

The pound is on soft form this morning ahead of today's key inflation data. GBP/EUR has fallen -0.2% to €1.1241, while GBP/USD is stuck around opening levels at US1.3842. GBP/AUD is flat at AU$1.7613, GBP/NZD has slumped to -0.4% to NZ$1.9002 and GBP/CAD is flat at C$1.7418.

Read on to see why Gertjan Vlieghe was unable to boost Sterling yesterday, and why markets weren’t 100% convinced with President Donald Trump’s US infrastructure plan…

What’s been happening?

Early gains for GBP/EUR and GBP/USD exchange rate were quickly shed yesterday, with the pound unable to capitalise on hawkish comments from Bank of England (BoE) policymaker Gertjan Vlieghe.

Vlieghe, who is known as one of the most cautious members of the Monetary Policy Committee (MPC), stated that the Bank of England was on a trajectory of interest rate hikes, rather than November’s tightening being simply a one-off followed by a long break.

This further reinforces the comments made by the MPC last week following their latest monetary policy meeting that UK borrowing costs are likely to rise at a faster-than-expected pace.

The euro was largely on soft form, with market focus on the US as traders prepared for President Donald Trump to reveal his long-awaited infrastructure plan.

Also weighing on euro sentiment was news that Martin Schultz was stepping down as leader of Germany’s Social Democratic Party (SPD).

That reminded markets of the upcoming vote amongst SPD members regarding whether or not the party will accept Angela Merkel’s offer of a third ‘grand coalition’; their refusal would mean Germany would have to head back to the polls after a full four months without effective government.

Trump’s infrastructure plan was met with a mixed response, which prevented the US dollar from recording strong gains.

On the one hand, markets welcomed the appearance of the plan, which has been promised for some time and has so far shown few signs of materialising.

However, analysts were sceptical that the proposal would make it through Congress, as well as noting that the plan relies on parties other than the government to come up with much of the funds required to meet Trump’s targeted outlay of ‘at least $1.5 trillion’.

What's coming up?

Today’s inflation data is likely one of the key reasons why GBP remained muted yesterday, as a weak reading could do much to undermine the Bank of England’s recent upbeat outlook upon monetary policy.

However, forecasts are supportive of further rate hikes - although overall consumer price growth is predicted to have slowed to 2.9% year-on-year, core price growth is expected to have climbed again to 2.6% year-on-year, after dropping further-than-forecast to 2.5% in December.

If core prices look like they are going to continue rising, this provides even more justification for the Bank of England to tighten monetary policy again.

There is no Eurozone data of note on the calendar today, while the only two developments on the US economic calendar will be the NFIB small business optimism index for January and a speech from Federal Reserve official Loretta Mester, who will be discussing the monetary policy and economic outlook.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Reaz Rahman
Senior Dealer

Reaz, our Senior Currency Dealer, joined us in January 2015. Reaz draws on his detailed knowledge of the foreign exchange markets to help customers to choose the right service and time to transfer.