Article Highlights

  • Fed hikes rates, outlines plan to reduce bond holdings
  • Australian dollar rises on robust employment figures
  • New Zealand dollar skids after GDP growth falls short
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Sterling surged over a full cent on Thursday following signs of a shift in the Bank of England’s stance on keeping UK interest rates at record lows, while the Federal Reserve’s sticking to expectations of further rises lifted the dollar.

Two more policymakers at the Bank of England (BoE) joined existing rate rise advocate Kristin Forbes in calling for a reversal to the Bank’s cut to interest rates last August, sending the pound as high as $1.2795 in the minutes following the Bank’s decision, which left rates unchanged.

Economists polled by Reuters had expected only Forbes – whose term on the Bank’s rate-setting committee expires at the end of the month – to back higher rates, especially given a slowdown in growth in the first three months of 2017.

The risks to that view – and to Sterling – were underlined by another lower than expected batch of retail sales data earlier.

“I still think there is a case for weaker (UK) growth so I don’t really agree with their arguments in the minutes this time,” said Richard Falkenhall, currency strategist with SEB in Stockholm, adding that he saw no change to the Bank’s policy this year or in the next.

“What will be important (for sterling going forward) is really the tone we will have in the first negotiations which will begin next week between the UK and the EU.”

The pound has hovered near the $1.27 mark after a near 3 percent fall in the wake of Britain’s election last week, which produced a “hung” parliament – no clear majority for any party.

Prime Minister Theresa May and her Conservative party are still in talks with another party from Northern Ireland to form a government, with just days remaining before the planned start date of talks on Britain’s exit from the European Union.

The dollar inched higher against a basket of peers, after the Federal Reserve’s policy meeting kept up expectations of another interest rate hike this year.

As widely expected, the Fed raised interest rates a quarter percentage point to a target range of 1.0-1.25 percent on Wednesday but it also gave its first clear outline on its plan to reduce its $4.2-trillion bond portfolio.

That undid all of the damage done to the greenback in Asian trading and pushed it higher in morning European trade.

The dollar was up half a percent against both the euro and the Japanese currency, at $1.1161 per euro and 110.080 yen.

The index that measures its broader strength was up 0.4 percent at 97.296.

A Reuters poll of 21 of the 23 primary dealers that do business directly with the Fed showed 14 of them now believed it would announce the start of its balance sheet normalization at its Sept. 19-20 policy meeting. The rest of them said it would make such a move at its Dec. 12-13 meeting.

“Long term Fed expectations remain very much supported – that is the main reason why the dollar is remaining supported for now,” said Manuel Oliveri, currency strategist with Credit Agricole in London.