GBP/USD: Cable Jumps after BOE Keep Rates Unchanged

The British pound is higher against the US dollar on Thursday afternoon after something of a surprise decision by the Bank of England to keep UK interest rates unchanged. The British central bank offered cautious guidance and lowered its economic growth targets.

GBP/USD was higher by 79 pips (+0.61%) at 1.3094 with a daily price range of 1.298 to 1.31 as of 1.30pm GMT. The daily gains would have been higher were it not for an early jump in the US dollar dragging the currency pair below 1.30, before it quickly rebounded over 100 pips to fall just short of 1.31.

GBP/USD – The pound

The BOE has kept interest rates unchanged at 0.75% but has lowered its forward guidance and also lowered its targets for economic growth in the United Kingdom. When comparing the last two statements, in December the Bank of England said it planned “limited and gradual” rates rises but now at its January meeting has changed its language to “some modest tightening”. Governor Carney at the press conference explained “limited and gradual implied multiple rate rises, and that’s not expected”.

So this is what is sometimes referred to as a ‘dovish hold’. The central bank has held interest rates steady but downgraded its plans for interest rates in the future.

With the benefit of hindsight, today’s decision should have been very straightforward for the Bank of England. Britain is about to leave the European Union in one day’s time and there will be a new UK budget next month announced by Chancellor Sajid Javid. So circumstances are changing, and it is too soon to know if it is for the better or for the worse economically.

GBP/USD – The dollar

On Thursday the latest data showed US GDP growth in the last quarter of 2019 was 2.1% year-over-year, in line with prior estimates. That compares very favourably with the 1.1% y/y reported during the third quarter of 2019 in the United Kingdom but is a deceleration from prior quarters in the United States. The growth data follows the decision by the US Federal Reserve yesterday to keep US interest rates unchanged at 1.50-1.75%.

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