FX round-up: More hawkish BoE sees sterling shoved higher

Sterling got a firm shove higher thanks to a more-hawkish-than expected leaning by Bank of England's policy makers in holding the benchmark rate and QE unchanged.

On the crosses, sterling enjoyed a wall-of-green performance, although the icebergs of Brexit, a hung parliament and rising inflation continued present.

BoE policymakers voted 5-3 in favour of holding rates and retaining QE at £435bn. Views were for a 7-1 voter split in the Monetary Policy Committee.

At 16:55 BST, sterling was up 0.12% to $1.2766, this rise somewhat muted by a resurgent dollar after the US Federal Reserve also presented itself more hawkish than expected last night.

The British currency was also up on the euro by 0.67% to €1.1444. It gained on the aussie, loonie, kiwi, rand and yen, too. But, it remained a shadow of its pre-Brexit referendum self.

Deutsche Bank Research chief economist Mark Wall said MPC's surprisingly hawkish outcome does not yet mean a rate hike is more likely than not.

"How this 5-3 split resolves itself will depend on three things."

These were economic momentum, inflation overshoot and whether or not the replacements for MPC members Kristin Forbes and Charlotte Hogg were policy hawks, said Wall.

IG market analyst Joshua Mahony observed that the three dissenters on the MPC had focused on their core mandate, which was price stability.

"Despite the sterling rally, there is little to worry about quite yet, for the loss of rate hike voter Kristen Forbes will likely bring us back to 6-2 next time out."

Sterling's BoE-driven rise after midday followed weakness after the Fed decision last night, and on disappointing UK retail sales data out mid-morning.

"As it stands, five members voted to keep rates on hold, but today’s vote shows the gap is narrowing," said David Madden, market analyst at CMC Markets UK.

Turning to the dollar, it, too, made gains on most key crosses, rising on the aussie, loonie, kiwi, rand, yen and euro.

Last night, the Fed raised its benchmark rate and flagged a reduction in its balance sheet.

"The EURUSD is being driven lower by the strength of the greenback," said Madden.

Fed Chair Janet Yellen unexpectedly lowered the inflation forecast and increased the growth outlook. In effect, said Madden, she was saying the weak inflation that the US was experiencing was not going to hold the Fed from further tightening.

"Traders were quick to exit their long (EURUSD) positions when the Fed reduced their CPI forecast, and announced that the balance sheet reduction would start this year," said Madden.

"The hawkish announcement by the Fed caught dealers by surprise, and the euro is being hit hard by it."