The pound rose by three cents against the dollar today as the markets reacted positively to the Bank of England (BoE) Quarterly Inflation report. Exchange rates climbed from $1.5215 to reach a high of $1.5515, the highest the GBP/USD cross has been since the 21st June and means Sterling has gained 2.65% against the dollar in less than a week. To put the move into perspective a £200,000 trade will now see you receive nearly $8,100 more compared to the same trade booked on the 2nd August. For more information on live market prices click here.
The pounds value increased as BoE Governor Mark Carney gave his speech this morning. The FX markets have been waiting in anticipation for todays announcement and Mr Carney used the opportunity to set out some guidelines of what the central banks future plans are.
Mr Carney and his fellow MPC members said they will not consider increasing interest rates until the unemployment figure in the UK has fallen to 7% or lower, unemployment currently sits at 7.8% and to bring the rate down to 7% would require around 750,000 jobs to be created. This does not mean that rates will automatically increase if the figure is reached but would be a point at which the Bank of England would re-examine interest rates.
The idea of Forward Guidance is basically a promise not to surprise the markets and with the boundaries now in place it will give investors and market players something to work with. As I said in my last post if what was said to today is taken as positive we could see GBP/USD exchange rates push back towards $1.55 and that is exactly what we have seen over the course of trading today.
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With Forward Guidance now in place it could make the FX markets a little easier to read. Any positive data out of the UK should now help boost the pounds performance while any negative data will mean rates start to fall. I know this sounds simple but it has not been the case in recent weeks. There has been so much speculation surrounding the BoE and whether they will look to increase the existing QE programme or interest rates that the positive data we have seen for the UK has had little or no impact on Sterling's performance.
The door is now open and if the UK continues to show signs of improvement the GBP/USD cross may carry on rising. However, lets not forget the U.S are still planning to reduce their own stimulus package and once the U.S Federal Reserve give the green light we can expect to the dollar to strengthen quickly and could easily wipe out any gains the pound has made.
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