Sterling briefly jumped to its highest against the euro in nine months on Thursday after two Bank of England policymakers unexpectedly backed an interest rate increase, but later erased all the gains. The pound also spiked above $1.42 before falling back as investors focused on the likelihood that rates will rise only very slowly. Against the dollar it ended up below where it had traded before the BoE's Monetary Policy Committee voted 7-2 to keep its main rate at 0.5 percent.
The no-change decision had been widely expected, but the division among policymakers will boost investors' confidence that borrowing costs will rise for only the second time since the 2008 as early as May However, Neil Jones, head of hedge fund FX sales at Mizuho Bank, said the pound fell after the initial jump because the BoE had reiterated that rate hikes would be "gradual".
Sterling has rallied this week after the European Union and Britain agreed a Brexit transition deal on Monday and UK workers' wage growth hit its fastest pace in almost 2-1/2 years, clearing the path for the BoE to tighten monetary policy soon. British retail sales published on Thursday also came in better than expected as inflation slowed.
Ben Edwards, a portfolio manager at BlackRock, said the BoE's focus on strong wage and global growth "all but nails on a hike at the May meeting". Before Thursday's policy meeting, investors had priced in as much as a 70 percent probability of a May rate rise by the BoE.
"However, its brushing over some of the weaker hard data since the November meeting, and recent undershoot of its own inflation projections, suggest this may be the summer hike brought forward rather than a significant chance of additional hikes," Edwards said. The pound, trading slightly above 87 pence per euro before the decision, briefly jumped to 86.675 pence, its strongest level since June 2017. It traded flat at 87.230 pence at 1415 GMT.
Against the dollar, sterling briefly rose to $1.4220 after the BoE decision before falling back to trade at $1.4114, down 0.2 percent and below its level before the rate announcement. "In my view, it was clear in February that the view of the majority was pretty close to the hike, so it's not a huge surprise," said Rabobank's senior currency strategist Jane Foley, adding that the two dissenting policymakers were known hawks.
UK gilt futures moved briefly, returning to close to the same level they were trading at before the BoE announcement. The FTSE 100 stock index was unmoved by the rate decision and remained down almost one percent. It later fell and was down 1.6 percent in afternoon London trading.
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