The Bank of England’s longer term projection for inflation threw a bucket of cold water over sterling which fell from 1.5600 against the dollar over 100 pips to below 1.5500, whilst it moved lower against the euro with EURGBP recapturing the 0.7000 level. Investors were positioned for a more hawkish meeting, expecting the MPC voting results to come in at 7-2 rather than the actual 8-1, where previous rate hawk McCafferty would be joined by Weale as he was when they were both voting for hikes last year. But this duo did not vote together and sterling plunged sharply as a result, despite the BOE increasing its growth outlook for the UK.
This justifies the view that the US’s Federal Reserve is likely to commence its tightening cycle sooner than the BOE and tomorrow’s nonfarm payroll figure will be crucial in providing further evidence as to whether they’ll move in September. As Mark Carney said in the press conference, the BOE is “closer” to raising bank rate as the UK economy returns to normal, but it is very much data dependent and the fact that he specifies the UK economy is not back to normal yet suggests rates will remain on hold for the remainder of 2015.