The Bank of England is dominating currency headlines this morning as it lifted its forecast for the country’s economic growth. Bank Governor Mark Carney said it may need to raise interest rates sooner than expected – and to a greater extent – to prevent the economy from overheating.
Pound rises on hawkish BoE release
The BoE kept interest rates unchanged, but the language in its policy report and Carney’s speech has the pound trading up against the dollar. The GBP/USD pair broke through 1.40 and reached a three-day high on the news.
BoE said inflation, at the current pace, is expected to be above the 2% target and that demand growth is outpacing supply growth. The bank could lift interest rates as early as May or as late as November so inflation returns to target. Carney stressed that rate hikes will be gradual.
Euro drops on sterling, dollar demand
The euro was under pressure this morning after the BoE’s hawkish tone sent the EUR/GBP pair lower, and continued demand for the dollar had EUR/USD reaching fresh lows.
EUR/USD traded as low as 1.221 this morning, but then reversed to near 1.228 levels.
The euro also weakened earlier in the day on European Central bank member and Bundesbank President Jens Weidmann’s comments in Frankfurt on Thursday that the bank would monitor the impact of the currency on inflation. Weidmann addressed the recent volatility in the financial markets, saying it is not a reason for concern.
Government shutdown deadline nears
Although Congress has yet to pass a funding resolution, we aren’t seeing the same weakness in the dollar that we did last month when the U.S. government was on the verge of a shutdown.
Part of that could be level of optimism around the government coming to a funding solution. Senate leaders agreed on a deal to fund the government and raise spending on military and domestic programs for the next two years by nearly $300 billion. The House and the Senate are set to vote on the deal today.
In economic report news, USD didn’t seem to be helped by initial jobless claims for the week ending Feb. 2, which came in better than expected this morning. The dollar was dropping against major currencies at the time of writing.