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Pound holds on to gains after boost from hawkish BoE

The dollar’s weakness helped sterling edge higher on Friday morning, consolidating the gains made after Thursday’s surprisingly hawkish Bank of England meeting.

Sterling was around $1.2770 at publication time, 0.14 per cent higher for the day and around 0.6 per cent above where it was immediately before the minutes from the latest Bank of England policy meeting were released.

The currency has now risen around 0.2 per cent for the week overall.

The minutes showed an unexpectedly close vote amid concerns about rising inflation, with three of the monetary policy committee’s eight members voting for an immediate interest rate hike.

The pound jumped as high as $1.2795 after the release, amid hopes that the hawkish tone made a future rate rise look more likely.

However, despite currency traders’ initial optimism, many economists were sceptical about the chances of an imminent rate rise.

The three dissenters on the MPC were all external members – one of whom will leave the committee next month – and Chris Turner at ING stressed this morning that “the five Bank of England members typically look through short term inflation spikes”.

Antje Praefcke at Commerzbank added that she expects the recent gains to be reversed in the near future:

Attention will soon focus on the Brexit negotiations again, that will start on Monday even though it is not clear anymore what the precise British strategy will actually be.

Moreover rising inflation rates and weaker growth are not usually a good combination for a currency. In other words: it is unlikely that sterling will be able to record further substantial gains.