Sterling hovers near 10-month high ahead of Bank of England rates decision

Sterling was flat this morning ahead of the Bank of England's interest rates decision after last night hitting levels not seen since mid-September last year.

Yesterday evening sterling rose as high as $1.325 against the dollar, the highest since 16 September when comments by former Bank official Kristin Forbes dragged the currency down. It traded at $1.323 at the time of writing.

Sterling's strength against the dollar in recent days has been driven in part by weakness in the greenback, as investors focus on the apparently diminishing prospects of tax cuts and increased fiscal spending from Donald Trump's White House.

Today the pound is likely to be driven by the outlook presented by the Bank of England. Its monetary policy committee will announce its latest interest rates decision at midday, with no movement expected by most City economists.

However, investors will still be keenly focused on the comments of governor Mark Carney, at a press conference at 12:30pm, as well as the updated forecasts for the next three years unveiled by the Bank.

Viraj Patel, a forex and macro strategist at ING, said: "While a bank rate hike today would come as a surprise to markets – and would see a knee-jerk move higher in short-term UK interest rates and the pound – we think what really matters once the dust settles is the underlying motivation for any BoE tightening."

"It may more be prudent to focus on the 'signal' sent around the potential scope and extent for further rate hikes over a two- to three-year horizon – as this is where markets will ultimately gravitate towards."

At the August MPC meeting a year ago the Bank cut bank rate by 25 basis points to 0.25 per cent. A year later there is little prospect of a reverse move, according to most economists, but markets are currently pricing in a more than 50 per cent chance of a rate hike during the first half of next year, according to Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi UFJ.

He said: "For the pound to strengthen significantly today it will likely require the BoE to give a stronger signal that a hike could come as early as in November in line with our expectations."

The forecasts will be particularly scrutinised for analysis of how weaker-than-expected growth in the second quarter affects the Bank's judgement on the health of the British economy.

The UK economy grew by only 0.3 per cent in the second quarter, according to the Office for National Statistics' preliminary estimates, a slight acceleration from the 0.2 per cent rate seen in the first quarter.

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