Setting a triumphant tone against both the U.S. dollar and the Euro, the British pound gained significantly in the overnight over speculation of – yep, you guessed it, interest rates.  Although there is plenty of evidence of short covering from the previous sell off in recent days, the tone of momentum reeked of carry trade bets made on recent comments made by Bank of England Governor Mervyn King and a rather dovish minutes report.

According to this morning’s Bank of England minutes, central bankers voted unanimously to hold interest rates at a record low of 0.5 percent.  As “recent developments were not sufficiently compelling to justify” a change in current monetary policy, the BoE saw nothing in justifying any rate increases as well as an expansion of the Quantitative Easing program.  The plan is currently set at 175 billion pounds.  Although the report was stable and expected, any further momentum higher in the currency will likely be dependant on the November 5^th meeting.  During this time, central bankers will review growth forecasts in order to better assess the current economic situation.  Forecasters have already noted that the UK economy may have very well exited the recession back in the third quarter with a 0.7 percent tick higher.  However, any visible weakness in the GDP figure may prompt another 25 billion pound increase in the asset purchase program, giving the underlying pound a bearish tone.

Notably, Governor Mervyn King was quoted in an individual article saying that interest rates in the U.K. will likely rise in the future “at some point”.  He also cautioned that “it would be wise to take this into account”.  Not only does this signal a potential shift in monetary policy, but also a shift in personal attitude as it seems that the UK monetary authority may see some signs of a stable economic foundation.  The statement also helps to fodder a sentiment that interest rates may be set to rise in the broader market, leaving the U.S. as the last player that will consider the option.  On this ticket, the British pound skyrocketed higher from the 1.6384 close yesterday in New York, to trade as high 1.6598.  Although a medium term pullback is highly likely, the sentiment may give plenty of support for anti-dollar buying throughout the day.

This entry was posted on Wednesday, October 21st, 2009 at 9:47 am and is filed under British Pound, Economic Indicators, Economy, US Dollar. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.