Sterling falls as BOE maintains cautious approach
The British pound fell to a one-week low against the US dollar, as the Bank of England upheld its commitment to record low interest rates.
The BOE kept interest rates at 0.5 percent and the asset purchase target at £375 billion, a decision that was widely accepted. The central bank began purchasing bonds in March 2009 to shore up Britain’s most far-reaching economic crisis in several decades. While it is believed the BOE will be the first of the major central banks to raise interest levels, policymakers are maintaining a cautious approach in order to uphold Britain’s surprisingly strong recovery.
Interest rates are likely to increase sometime after the UK’s unemployment rate reaches its target threshold of 7 percent. The BOE has struggled with its forward guidance, which may have harmed the central bank’s strategy. Market participants are growing less confident in the BOE’s forecasts; according to 15 of the 29 analysts surveyed by Reuters last month, unclear monetary policy has harmed the BOE’s credibility.
“Given the growth forecasts and the huge divergence between the two variants set out in the Inflation Report, forward guidance has not had the desired effect of anchoring policy expectations, which now look less anchored than ever,” said Peter Dixon of Commerzbank.
Last month the BOE surprised the markets by saying the unemployment rate could reach its threshold in late-2014. These comments came after the BOE brought forward its guidance on unemployment to the third quarter of 2015.
The GBPUSD fell toward initial support after losing 58 pips in the European and North American sessions. The currency pair is trading at 1.6325, as investors temper bullish optimism amid fresh waves of US data. Sterling hit a 27-month high of 1.6438 US earlier in the week amid solid construction and manufacturing PMI data.
Sterling took a beating against its European rival, the euro, which soared 75 pips to 0.8370 GBP after the European Central Bank kept interest rates unchanged.
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