The British Pound Sterling edged up against the dollar and euro on Friday, February 23, but finished the week in much the same place as it had started, with weaker-than-expected economic data being offset by hawkish comments from Bank of England policymakers.
The pound was up 0.2 percent on Friday at $1.3988, and was down 0.3 percent on the week.Against the euro, it was up 0.3 percent at 88.04 pence, and up 0.4 percent on the week.
The BoE’s chief economist Andy Haldane told parliament on Wednesday the central bank could end up needing to raise interest rates faster than investors currently expect, sending the pound higher.
Though Haldane’s colleagues at the Bank struck a slightly less hawkish tone, they were still upbeat. Governor Mark Carney said there was no need to give a direct commitment on rates as markets – which have largely priced in a May rate hike – had broadly understood the BoE’s message.
Thus an unexpected downward revision to Britain’s fourth-quarter GDP on Thursday only resulted in a temporary bout of sterling weakness.
“The key takeaway from the Bank of England… was that policymakers’ tolerance of inflation well above target has ended,” said City Index analyst Ken Odeluga.
“Sterling uncertainty remains, not least given the relapse of the dollar as its recent revival threatens to fade. But as UK monetary policy catches up with a stronger-than-forecast economy, probabilities for a sustained sterling recovery are rising,” Odeluga added.
Other data released this week showed wage growth steady in the last three-month period, but the jobless rate unexpectedly ticked higher. Again, the numbers had only a temporary and modestly negative effect on sterling.
BoE officials are likely to have noted pay jumping 2.8 percent in December alone in the same labour market numbers, though that was still weaker than the 3.0 percent reading of British consumer price inflation for December.
“We believe that the pound will be supported mainly by two factors: reduced political uncertainty, and a hawkish Bank of England,” UBS Wealth Míanagement strategists wrote in a research note on Friday, adding that they saw a rate hike coming in May, and perhaps another later in the year.
“The December agreement between the EU and the UK to start negotiating a transition deal for 2019–2020 was an important breakthrough,” they continued. “It suggests there is enough political will to not let the talks end in a cliff-edge ”hard Brexit“ situation.”
