‘Dovish’ Rate Hike Causes Pound to Drop

The Bank of England raised its baseline interest rate to 0.5 percent on Thursday and that was the first time since 2007 that the BOE has made a rate hike. Normally when a country’s central bank raises interest rates, the currency of the country climbs against other currencies, but that wasn’t the case with the Pound.

When interest rates are rising in a country, the assets denominated in that currency become more valuable and thus the currency itself normally rises. Because the rate hike from the BOE was later than other central banks and because there is little to suggest that another hike is on the horizon, the hike wasn’t taken as a sign of a more hawkish stance. On Bloomberg they were calling it a “dovish” rate hike.

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In Thursday’s Forex trading, the Pound fell 1.5 percent against the Dollar and against the Yen. Looking at the chart for the CurrencyShares British Pound Sterling Trust (NYSE: FXB), we see that the drop has caused the fund to drop below the lower rail of a trend channel that has dictated trade since the middle of March.

The Pound has also been scrutinized more closely than other currencies due to the Brexit plans and the ongoing negotiations for the conditions of Britain exiting the European Union. The negotiations have proven to be complicated and there is another round set to occur next week.

Mark Carney, Governor of the Bank of England, pointed to the Brexit negotiations as a risk to the British economy. Carney stated that “businesses and households think about the future, think about their investment plans, spending plans. It will have certainly an impact on a range of financial asset prices, notably the exchange rate. And we as a committee will have to step back and assess the new outlook and calibrate policy appropriately.”

Given the tone of Mr. Carney’s statements, it is understandable as to why the Pound fell against other currencies. An action that normally induces confidence in currencies was weakened by the statements of the head of the central bank.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.