The pound edged higher on Thursday after the Bank of England kept policy rates unchanged, as widely expected, with broad dollar weakness lifting the British currency slightly. All nine members of the BoE's Monetary Policy Committee voted to keep rates on hold at 0.75% and reiterated their warnings that exiting the European Union without a deal risked hitting sterling and damaging growth.
"The Bank of England is pretty much on hold until there is a clear decision on Brexit and they were less upbeat on their growth and inflation forecasts as well," said Morten Lund, a senior FX strategist at Danske Bank. Against the dollar, the pound floated 0.1% higher at $1.2482 after briefly falling to the day's lows at $1.2448 following the central bank rate decision.
Britain's economy unexpectedly shrank by 0.2% in the three months to June. On Thursday, the BoE said its staff now predicted a small bounceback of 0.2% in the three months to September, compared with the 0.3% it predicted six weeks ago. Newsflow on the Brexit front was also not supportive of the pound.
Britain said on Thursday it had shared documents with Brussels setting out ideas for a Brexit deal, but an EU diplomat described them as a "smokescreen" that would not prevent a disorderly exit on the Oct. 31 divorce date. Derivative markets signalled a pick-up in expectations of swings in the pound in the coming weeks, with one- and two-month volatility gauges spiking higher on Thursday. One-month implied volatility rose to near its highest levels this month at 10.2 vol.