Sterling gained on Thursday after the Bank of England held interest rates at 0.75%, defying money markets that had seen a 50% probability of a cut to help the economy.
Following the move, interest rate futures moved to almost price out a rate cut at the March meeting as well, reinforcing the pound’s gains. Money markets are still pricing in a quarter-point reduction by September, however.
“Both the hold and the vote will add upside pressure for the pound,” Neil Jones, head of FX hedge fund sales at Mizuho said.
Sterling rose to $1.3109, up 0.7% on the day and its highest since last Friday. Against the euro, the currency gained 0.5% to 84.15 pence.
The meeting, the last under Governor Mark Carney, was one of the least predictable for years. Money markets had factored in a 50% probability of a 25-basis-point rate cut.
Britain’s economy struggled at the end of 2019, prompting several policymakers to say this month they would vote for a rate cut unless data improved. Carney said earlier this month a case could be made for a precautionary cut.
But economic momentum has shown signs of picking up since December’s general election, the BOE said, adding that signs of global stabilisation also meant stimulus was not needed yet.
The Monetary Policy Committee remained split along 7-2 lines as before, with external members Michael Saunders and Jonathan Haskel again voting to lower rates.
The benchmark FTSE 100 equity index fell 1.5% to session lows as the pound rose. The mid-cap FTSE 250 benchmark rose, then headed towards its lows for the day, losing 0.8%
Ten-year British government bond yields, which had dropped to three-and-a-half-month lows of 0.484% earlier, rose after the meeting to 0.53%.
Analysts expect sterling’s strength to be limited. More positive data on an economic rebound is needed before the currency could move much higher, they said.
Investors are also wary as Britain officially leaves the European Union on Friday, setting the clock ticking on an 11-month deadline to reach a trade agreement with the EU.
The BoE decision prompted money markets to slash their expectations for a rate cut in March, the month its new governor, Andrew Bailey, takes over. They now see just a 16% probability of a 25 bps cut, versus 80% before the announcement.
Dean Turner, UK economist at UBS Wealth Management, said recent flash PMIs signalled a post-election economic recovery but added that the economy was likely to hit more obstacles.
“Therefore we still expect the BoE to cut rates at some point in the next six months to give the economy additional support,” Turner said.