BOE rate hike

The Bank of England’s interest-rate hike wasn’t enough to lift the British pound into positive territory versus the U.S. dollar on Thursday.

The U.K. central bank upped its benchmark rate by 25 basis points to 0.75% in an unexpectedly unanimous vote. While market participants had foreseen the rate increase, they assumed some dissent among the members of the Monetary Policy Committee.

In its statement, the BOE said that the slowdown in the economy in the first quarter was temporary and that recent data showed some recovery in the second quarter of the year. That said, the committee said it “continues to recognize that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.”

Investors’ concerns about the state of U.K.-EU relations with the final Brexit date in March 2019 coming closer have overshadowed the BOE’s tightening bias. Analysts recognized that with rising inflation, in part due to the weaker pound, and an uncertain economic path ahead, the BOE was caught between a rock and a hard place in terms of how to conduct its monetary policy.

“The Bank of England did not disappoint as the central bank opted to hike its borrowing costs to 0.75%. The news was largely welcomed by the hawks as policy makers voted unanimously in favour of the adjustment and agreed that further increases will be needed in the medium term,” said Nish Parekh, managing director at Silicon Valley Bank.

“Cable enjoyed a small relief rally following a morning in the troughs as the market expected a 8-1 vote, however sterling bulls will remain cautious as to the delivery of future tightening and if governor [Mark] Carney can shake his unreliable boyfriend name tag.”

The sterling-dollar pair GBPUSD, -0.6551%  , also known as cable, pared losses following the decision but slipped back shortly after. The pound last bought $1.3093, down from $1.3127 late Wednesday in New York.

The euro, however, slipped versus the U.K. currency EURGBP, +0.2927%  , last buying £0.8870, down 0.2%.

The ICE U.S. Dollar Index DXY, +0.30%  , meanwhile was 0.3% stronger at 94.944.

The BOE concludes a week of central-bank updates, including one from the Bank of Japan, which made small tweaks to its policy but stayed more or less on course, disappointing investors. The Federal Reserve also met this week but remained on course for its policy normalization. Market participants expect an interest-rate hike from the Fed at its next meeting in late September.

Meanwhile, the Turkish lira USDTRY, +1.3030% continued its slide versus the dollar, as the U.S. currency stood firmly above 5 lira on Thursday after breaching that benchmark for the first time in history on Wednesday.

One dollar last bought 5.0467 lira, up 1%, according to FactSet.

The diplomatic rift is related to American pastor Andrew Brunson, who is being held in Turkey. On Wednesday, the U.S. sanctioned Turkey’s interior and justice ministers over the issue.

South Africa’s rand USDZAR, +1.4727% performed even worse than the lira against the buck on Thursday.

That country’s leading ANC party announced it would support a constitutional amendment to allow land expropriation without compensation in some cases, which is “expected to have a negative impact on investors’ confidence and dampen foreign flows into South Africa,” said Elsa Lignos, global head of FX strategy at RBC.

One dollar last bought 13.4400 rand, up 1.7% from Wednesday.

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Source: marketwatch.com