British Pound Surges Following Bank of England’s Rate Cut

British Pound Surges Following Bank of England’s Rate Cut - Why?

The British pound remained strong on Thursday, gaining against every major currency except the Japanese yen and Canadian dollar, despite the fact the Bank of England cut the Bank Rate to the lowest level since the bank was founded in 1694. What gives? First of all, the BOE’s 50 basis point reduction was in line with expectations, so there was no surprise factor coming in to play.

Meanwhile, though the Monetary Policy Committee’s (MPC) subsequent policy statement was quite bearish on economic conditions in the UK and abroad, they did not give any indication that they would cut rates again during their February 5 meeting. In essence, the British pound’s rally today indicates that the currency’s nearly 30 percent drop against the US dollar and 53 percent plunge versus the Japanese yen over the past 6 months has gone above and beyond pricing in rate cuts by the BOE. At this juncture, actual rate cuts are having little impact on the currency markets, as traders are more focused on comparative long-term interest rate expectations.

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