Bank of England keeps interest rates on hold: What does this mean for Sterling?

Enrique Díaz-Álvarez15/Jan/2016Currency Updates

After a troubling and surprising start to the year for Sterling, it was well supported against most of its major peers on Thursday after slightly less dovish than expected minutes from the Bank of England. Now we wait to see if this is the beginning of a retracement for GBP/EUR.

For the sixth straight month, Ian McCafferty, the lone hawk in the Bank of England, maintained his vote for an immediate interest rate increase, defying some expectations for a 9-0 vote amid global economic headwinds.

The accompanying statement was also less dovish than the market had been pricing in, albeit little changed on last month. Policymakers suggested international activity had evolved broadly as expected since November, appearing unfazed by the ongoing financial turmoil in China.

By contrast, the minutes from the ECB’s December meeting weighed on the Euro by opening up the possibility to further monetary easing in the coming months.

This reinforces our view that the sell-off in the Pound, particularly against the Euro, has been excessive and should reverse over the coming months. The GBP/EUR pair is now at levels not seen since February 2015, significantly below the Bloomberg average forecast. In reaction, we’ve seen a large number of businesses hedging their EUR inflows into GBP.

The US Dollar had a relatively mixed day, ending mostly unchanged despite some dovish comments from St Louis Federal Reserve President James Bullard.

Bullard suggested that the recent drop in oil prices, which has seen crude oil fall to around $30 a barrel, may have caused a ‘worrisome’ drop in inflation expectations and could prevent the Fed from reaching its inflation target. Price growth should return back to the 2% target once oil prices have stabilised. This, however, could take longer than expected, Bullard warned in his latest speech.

Businesses with exposure to the US Dollar should be alert as after months of positive data from the US, these external issues, meaning oil prices and developments in China, could be the fly in the ointment.

Major currencies in detail:


Immediate gains following yesterday’s MPC minutes were enough to cause the Pound to end 0.1% higher against the US Dollar.

The interest rate was unsurprisingly kept unchanged and the minutes themselves were little changed from a month previous with the vote remaining 8-1 in favour of no action. Policymakers continue to expect UK inflation to remain low amid a weak global economy and low oil prices.

However, the minutes did suggest that the latest plunge in oil prices would provide good long-term support for UK spending, while recent Sterling depreciation would lessen the drag on inflation to some degree.

Overall, the minutes were mostly positive for long-term Sterling strength, and we stand by our call for an interest rate hike in the third quarter.


Early gains for the Euro were wiped out as the day progressed, with the single currency ending 0.1% lower against the US Dollar.

Somewhat overlooked by the markets, the minutes from the ECB’s most recent meeting at the beginning of December were slightly on the dovish side. ‘Some’ rate setters argued for a longer extension and expansion of the existing easing measures last month, while a ‘few’ suggested a larger cut to the deposit rate. Critically, the minutes claimed that there was room to cut the deposit rate further into negative territory.

Earlier in the day, real GDP growth in Germany surprised on the upside. Europe’s largest economy expanded by 1.7% in 2015, marking its fastest rate of growth in four years.

Today should prove to be a relatively quiet end to the week in the Eurozone, with trade balance data the only announcement of note.


Comments from Fed member Bullard could not prevent the US Dollar climbing 0.2% against its peers following broad Euro weakness on Thursday afternoon.

In terms of economic data, initial claims for jobless benefits remained strong and comfortably below the benchmark 300k level at 284,000.

In other news, export and import price growth remained stubbornly negative at a meagre -6.5% and -8.2% respectively.

The most significant data point of the week, US retail sales, will be announced at 1:30pm UK time today. Any figure above the flat reading expected could provide good support for the US Dollar this afternoon. Industrial production data will also be worth looking out for.

Rest of the world

The Hong Kong Dollar fell to its weakest position in four years and dropped by its most in 13 years on speculation that the currency’s 32-year-old peg to the Dollar is coming to an end.

Meanwhile, the Canadian Dollar hit a fresh 12-year low on speculation that the Bank of Canada may cut rates next week.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.