The Bank of England (BoE) left interest rates and its asset purchase target unchanged on Thursday, amid expectations from some analysts that sterling could be set for a fall.
As expected, the bank decided to hold off on adding to the £375 billion ($628 billion) of asset purchases it has unleashed over previous years and kept its main benchmark rate at a record low of 0.5 percent. Sterling remained relatively unchanged after initially rallying after better-than-expected house price data during the morning session. David Bloom, HSBC's global head of foreign exchange strategy, believes that many strategists are "completely wrong" in believing the currency could push higher from these levels.
An appreciation of the British pound appeared to stall in May and the currency likely to trend lower in the near term, according to some strategists. Bloom added that the current account deficit in the U.K. and the lack of earnings growth meant he was bearish on the currency.
From a low of around $1.4865 last July, sterling climbed 14 percent to hit a high of $1.6976 in early May - a level not seen since August 2009. However, after dovish words from BoE Governor Mark Carney the currency has come under pressure and is expected to fall Thursday and Friday with a host of other economic events crowding out the BoE's rate decision.
"It is starting to look decidedly mediocre (for the pound)," Kathleen Brooks, a research director at Forex.com said in a research note earlier in the week. "From a market perspective, a lot of the good economic news is already priced in."
External fundamental events could hurt the pound this week, she explained, with any disappointment over the European Central Bank (ECB) decision - also taking place on Thursday - meaning the euro could be bought at the expense of the pound. The immediate outlook for the dollar remains strong after the dollar index closed last week above its 200-day moving average, she added, and a strong payrolls report on Friday could yet further support the dollar bulls, she said.
The case for sterling strength over the past ten months has been overwhelming. Inflation has been kept near desired levels, gross domestic product has swung higher and the country has received favorable comments from numerous organizations including the International Monetary Fund and the OECD. This uptick was further confirmed on Wednesday with a Purchasing Managers Index for the service sector showing robust business activity, with companies taking on staff at the joint fastest rate since May 1997.
With U.K. data showing so much promise it's likely that the U.K. could be the first of the major developed nations to raise interest rates at some point next year. Although nothing can be confirmed until the minutes of Thursday's meeting are released on June 18, some economists expect a potential split at the Bank's monetary policy committee over when to raise rates, with three new members set to join the team this summer.
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