Pound rallies after Bank of England statement
The British pound continued to appreciate after the Bank of England gave wings to the British currency. The British pound is headed for its fourth weekly positive close in a row backed by the strong August inflation print and the hawkish statement from the Bank of England. The British central bank surprised markets with its warning about a possible rate hike in the future. Markets weren’t expecting the Bank of England to increase the interest rates from the current low levels at least until the Brexit negotiations take some shape.
Stimulus to be reduced first
Like the US Fed, the Bank of England is likely to reduce the stimulus program first and then look at increasing the interest rates. The reduction of stimulus is not likely to be a long-term event as the current program authorizes the purchase of 435 billion pounds and 10 billion pounds of government and corporate bonds, respectively. If that is the case, it could take only a few months before the stimulus is completely removed and we see the first rate hike. That, however, might not stop speculators from betting on a rate hike from now on.
Outlook for the British pound
The British pound has now joined the stimulus exit currency group. Traders are likely to place the pound (FXB) in the same group as the euro (FXE). If the US dollar (UUP) turns weak, flows are likely to be directed towards the euro (DRR) and the pound (GBB), and vice versa.
Over the next few months, the volatility in the British currency is likely to remain high as traders could keep guessing every move of the BOE. All the economic releases from the UK and speeches by BOE members should be monitored to access the direction of the British pound.