Forex - Pound jumps after surprise BoE rate hike; Short sterling drops UPDATE
LONDON - The pound jumped after the Bank of England took the market by surprise by raising UK interest rates to a five-year high of 5.25 pct.
The news caused market players to upgrade their expectations for UK interest rates and caused the euro to fall to a 19-month low of 0.6645 against the pound.
At 12.34 pm, the pound was trading at 1.9493 against the dollar, up sharply from 1.9376 just before the news was announced, while the euro dropped to 0.6653 stg from 0.6690 previously.
UK short sterling futures -- a gauge of interest rate expectations -- were also sharply lower, with the March future down 0.17 at 94.32 after trading at 94.48 earlier in the day.
The BoE hike was completely unexpected by the market. In an accompanying statement, the BoE justified the move by saying that the risks to the inflation outlook are on the upside compared with the forecasts it made at the time of its last quarterly inflation report in November.
'The market had not looked for this move but will now likely look for two more rate hikes this year and see 5.75 pct as opposed to 5.50 pct,' said IdeaGlobal analyst Divyang Shah.
The BoE typically changes interest rates in the same month as it releases its inflation report, hence most in the market had expected a hike next month. This is the first time the BoE has raised interest rates in a non-inflation report month since June 2004.
'Quite clearly, the MPC's hackles are up and they are clearly concerned about the recent acceleration in UK inflation and the fast pace of monetary expansion,' said David Brown at Bear Stearns (nyse: BSC - news - people ).
He believes UK rate setters may well remain on a tightening bias.
'The MPC hawks could be straining on the leash for a further rate hike to keep inflation risks battened down,' he added.
As a result, short dated UK yields are likely to come under more pressure while the pound is seen rising further, he added.
Meanwhile, the pound also rose close to eight-year highs against the yen of 234.80, up from 233.30 just before the announcement.
The yen has been falling recently as investors increasingly expect that the carry trade -- when people borrow in low-yielding currencies such as the yen to invest in higher yielding assets elsewhere -- will remain alive and well. With the Bank of England now looking set to raise interest rates more than previously thought, today's decision will only reinforce yen weakness.
The surprise decision puts the sterling/yen rate 'squarely in play', IdeaGlobal's Shah said.
The news caused market players to upgrade their expectations for UK interest rates and caused the euro to fall to a 19-month low of 0.6645 against the pound.
At 12.34 pm, the pound was trading at 1.9493 against the dollar, up sharply from 1.9376 just before the news was announced, while the euro dropped to 0.6653 stg from 0.6690 previously.
UK short sterling futures -- a gauge of interest rate expectations -- were also sharply lower, with the March future down 0.17 at 94.32 after trading at 94.48 earlier in the day.
The BoE hike was completely unexpected by the market. In an accompanying statement, the BoE justified the move by saying that the risks to the inflation outlook are on the upside compared with the forecasts it made at the time of its last quarterly inflation report in November.
'The market had not looked for this move but will now likely look for two more rate hikes this year and see 5.75 pct as opposed to 5.50 pct,' said IdeaGlobal analyst Divyang Shah.
The BoE typically changes interest rates in the same month as it releases its inflation report, hence most in the market had expected a hike next month. This is the first time the BoE has raised interest rates in a non-inflation report month since June 2004.
'Quite clearly, the MPC's hackles are up and they are clearly concerned about the recent acceleration in UK inflation and the fast pace of monetary expansion,' said David Brown at Bear Stearns (nyse: BSC - news - people ).
He believes UK rate setters may well remain on a tightening bias.
'The MPC hawks could be straining on the leash for a further rate hike to keep inflation risks battened down,' he added.
As a result, short dated UK yields are likely to come under more pressure while the pound is seen rising further, he added.
Meanwhile, the pound also rose close to eight-year highs against the yen of 234.80, up from 233.30 just before the announcement.
The yen has been falling recently as investors increasingly expect that the carry trade -- when people borrow in low-yielding currencies such as the yen to invest in higher yielding assets elsewhere -- will remain alive and well. With the Bank of England now looking set to raise interest rates more than previously thought, today's decision will only reinforce yen weakness.
The surprise decision puts the sterling/yen rate 'squarely in play', IdeaGlobal's Shah said.
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