The British pound headed for its best week since 2009 against the U.S. dollar after the appointment of Theresa May as Prime Minister returned a sense of political stability to the U.K. and the Bank of England unexpectedly kept interest rates unchanged.
Sterling pared its gains Friday after BOE Chief Economist Andy Haldane signaled policy easing will likely be required to bolster the U.K. economy after the country voted to leave the European Union. The currency rallied earlier amid speculation the central bank may take a less aggressive approach than was initially expected in its measures to contain the fallout from a Brexit.
The pound strengthened against all its 31 major peers this week amid a clearer political landscape in the U.K. after May took office and appointed a new cabinet, ending a period of uncertainty that has lasted since the June 23 referendum.
ARTICLE CONTINUES BELOW
ARTICLE CONTINUES BELOW
“It definitely helped that the BOE didn’t cut rates yesterday and that May took over sooner than expected,” said Esther Reichelt, a Frankfurt-based currency strategist at Commerzbank AG. However, “it’s still too early” for a sustainable rally in sterling, she said.
Policy easing will likely be required to “protect the economy and jobs from a downturn” caused by uncertainty, Haldane said, according to the text of a speech delivered in Port Talbot, Wales, on June 30 and updated to reflect his current view.
The pound rose 0.1 per cent to $1.3360 as of 11:04 a.m. London time, having climbed earlier to $1.3481, the highest since June 30. The currency has gained 3.1 per cent versus the dollar this week, the most since October 2009. Sterling weakened 0.1 per cent to 83.39 pence per euro, paring its weekly gain to 2.2 per cent, still the most in a year.
The U.K. currency’s rally comes after it fell to the lowest level against since 1985 against the dollar last week, and it remains about 10 per cent lower since the country’s vote on EU membership.
The BOE’s decision Thursday to leave its key rate at a record-low 0.5 per cent surprised markets and a majority of economists. Futures pricing before the announcement showed the chance of a cut at about 86 per cent, while 31 out of 54 economists surveyed by Bloomberg predicted lower rates. The central bank maintained its asset-purchase target at 375 billion pounds, even as officials led by Governor Mark Carney signaled they’re readying stimulus for August.
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