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BOE Rate Talk Sends Pound to 2 ½ Year Highs Against US Dollar

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BOE Rate Talk Sends Pound to 2 ½ Year Highs Against US Dollar

The British pound shot up following the Christmas holiday amid speculation the Bank of England could raise interest rates sooner than expected.

The GBPUSD pair reached a two-and-a-half year high on the eve of the New Year holiday. On January 1 the pair was trading at 1.6571, a gain of 13 pips. The trend index is slightly bullish, with technical supports ascending at 1.6435, 1.6476 and 1.6518. On the upside, resistance is ascending at 1.6626, 1.6667 and 1.6709.

While trade volumes have been limited during the holidays, investors are confident the British central bank will shift its stance on monetary policy in the near-term. The BOE is widely expected to become the firms of the major central banks to raise interest rates.

The UK economy has been in expansion mode for three consecutive quarters, led by gains in manufacturing and residential real estate. The pace of jobs creation has soared above expectations, forcing the BOE to bring forward its guidance on the unemployment rate. According to BOE Governor Mark Carney, the central bank won’t consider raising interest rates as long as unemployment is above 7 percent. The UK unemployment rate fell from 7.7 percent to 7.4 percent in the three months to October, the lowest level since April 2009.

Exuberance surrounding BOE policy overshadowed the Federal Reserve’s latest decision to pare back asset purchases by $10 billion, beginning in January. The market’s reaction to the unexpected decision has been subdued at best, as investors speculate about the pace and timing of future stimulus cuts.

Underlying the pound’s impressive performance has been wave after wave of upbeat economic data from the UK. Markit Group will report on British manufacturing PMI on Thursday. In November UK manufacturing activity accelerated at the fastest pace since February 2011, led by new orders.

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