Summary:

• BoE leaves rates unchanged with just two dissenters (7-2)
• BoE points to limited tolerance for faster inflation and scope for stimulus reduction
• GBP rallies on the hawkish statement and MPC minutes

The Bank of England left interest rates as well as its bond buying program on hold which was in line with market expectations. Nevertheless, there were some hints suggesting increasingly limited tolerance for higher inflation. As a result, the pound has rallied immediately, a very short-lived decline has taken place though.

One could assume that a knee-jerk reaction (to the downside) on the GBPUSD might have stemmed from the voting, where there had been guesswork that as much as 3 voters would have been in favor of a hike. That said, algorithmic trading possibly did its job, before physical traders enter the market. Below, we present major remarks from today’s decision:

• eroding slack is reducing tolerance for higher inflation
• any interest rates increases to be gradual and limited
• market is under-pricing future interest rate rises
• expects inflation rate to exceed 3% in October
• majority sees scope for stimulus reduction in coming months

On the face of it, there are clearly hawkish references which could reignite odds for a rate hike this year. It seems that the BoE is getting more afraid of higher inflation even as the major part of it is a side-effect of the pound depreciation. Having regard to sluggish pace of GDP growth, still negative real wage growth and simmering uncertainties surrounding the Brexit negotiations, a decision to hike rates might be dubious. On the flip side, the MPC appears to be more concerned over runaway inflation rather than a possible downturn in the economy which could occur in the aftermath of tighter financing conditions.

Having said that, even as the pound could gain a foothold in the near term on the back of mounting chances to get a rate increase, things could change going forward if the economy reports another lackluster growth in the third quarter. Let us recall that bleak consumption was a main contributor to the grim second quarter, thus taking into account still negative wage growth one could foretell that the most important part of the UK’s economy could disappoint again.

The GBPUSD has soared following the BoE hawkish remarks. Source: xStation5

Technically, the pound has wobbled over the course of recent days. At first, we got higher inflation which lifted the currency. Afterward, there was the gloomy labor market report (when it comes to nominal wage growth). Finally, the BoE seems to have done another U-turn reigniting odds for a hike as soon as this year.

Taking a look at the chart above one could notice the pair has bounced off a crucial support placed at around 1.3160. Therefore, the price could keep on going up and march towards 1.3450, the last local peak has to be broken though.