Sterling soars after Bank of England’s Forbes votes for rate hike

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17 March 2017


The Pound rose by almost one percent against the US Dollar on Thursday after Bank of England rate setter Kristin Forbes unexpectedly voted for an immediate rate increase at the central bank’s latest monetary policy meeting.

orbes, generally seen as one of the more hawkish members of the rate setting committee, caused the first split vote since July 2016, claiming that domestically generated inflation in the UK had increased notably. The minutes showed that “some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted”. The BoE is also forecasting relatively strong growth of around 2.0% this year, far from levels that would warrant near zero interest rates.

The communications from the Bank of England were distinctly more hawkish than the market had been anticipating prior to the meeting, with Sterling rallying against almost every major currency. We have been saying for a number of months now that financial markets are underestimating the chances of an increase in interest rates by the Bank of England this year. Markets are currently pricing in less than a 30% chance of a hike before the end December 2017 (Figure 1). However, we think that this is slightly low, and yesterday’s announcement from the BoE seems to support this.

Figure 1: Market Implied Probability of BoE Hike in 2017 (Jan ‘17 – Mar ‘17)

Meanwhile, the US Dollar slipped to a five week low off the back of the slightly less hawkish than expected communications from the Federal Reserve on Wednesday evening. Investors will quickly turn their attention to the timing of the next rate increase, with Fed fund futures suggesting this would take place at the June meeting.

A notable mention goes to the Turkish Lira which took its two-day gains to 3.5% after the country’s central bank hinted that additional interest rate hikes remained on the cards.

Major currencies in detail


Sterling rallied by 0.8% to a two week high against the US Dollar yesterday after Thursday’s Bank of England meeting.

Markets reacted primarily to the unexpected 8-1 split in MPC member voting yesterday, although the minutes themselves also suggested that a rate increase toward the end of 2017 may be a realistic possibility. Policymakers expect inflation to exceed the 2% target “over the next month or so”, with price growth to “exceed the target materially by the summer”. We think there is an extent to which the BoE can keep overlooking the increase in prices, without raising rates.

With economic data scarce in the UK today, Sterling is likely to be driven predominantly by events elsewhere.


Buoyed by the result of the Dutch Parliamentary Election on Wednesday evening, the Euro rose 0.1% against a broadly weaker US Dollar yesterday.

Investors breathed a sigh of relief after the Netherlands Election results came in broadly in line with the latest opinion polls. The far-right PVV Party fell comfortably short of being named the largest party, somewhat reassuring investors ahead of the first round French Presidential Election on 23rd April. Marine Le Pen remains marginally ahead of Emmanuel Macron in the first round polls, although is expected to lose out in the run-off vote.

German Chancellor Angela Merkel and US President Donald Trump will also be meeting in the White House today. Any news or comments on trade could prove a market mover today.


The US Dollar fell 0.2% against its major peers on Thursday, remaining on the back foot following Wednesday’s Fed meeting.

The mostly positive economic news out across the pond yesterday continued to support the need for higher interest rates in the US. Initial jobless claims continued to print around their lowest level in four decades, falling slightly last week to 241K from 245K. Housing also rose 3% in February while the Philly Fed manufacturing survey came in at 32.8 versus the 30.0 consensus.

Today will see mostly second tier economic data releases out of the US. Industrial production data for February is expected to show a modest uptick.