The Bank of England’s decision to hold interest rates at 0.5% has seen sterling rally – showing increased confidence the UK economy.
It briefly traded as high as $1.3470, a 2.7% gain on the day, but has since eased back to $1.3342.
David Lamb, head of dealing at FEXCO Corporate Payments, said: “QE aside, interest rates are the Bank of England’s biggest monetary policy weapon. But with rates already so low, the Bank only has one bullet in the chamber – and today it opted to delay pulling the trigger.
“While the Monetary Policy Committee’s minutes predict many storm clouds on the horizon, it clearly fears playing its rate cut trump card too early.
“The bank’s surprise caution came as a jolt to currency markets that had convinced themselves that a cut today was a done deal.
“The result was a strong upward spike for the Pound against both the Dollar and the Euro, but few will see this as much more than a temporary respite.
“With the MPC’s next meeting barely three weeks away, the prospect of a rate cut remains real and close.”
But Lamb added that the current direction which the Bank of England is taking appears to be the right one.
He said: “But with little hard economic data to back up the dire – but still largely anecdotal – evidence of a post-referendum downturn, the bank’s ‘wait and see’ approach makes sense.
“If there is a time for the MPC’s grandees to cut rates, it will be in August when they have the bank’s next Inflation Report in hand and a clearer picture of the impact of the Brexit vote on the UK economy.
“As a result today’s Sterling rally won’t be immediately erased, but the outlook for the Pound remains weak.”