Sterling Uplifted by Rate Hike Expectations

Sterling bulls hit Thursday trading with a renewed sense of confidence after the Bank of England signaled that interest rates could rise faster than previously anticipated.

Although the MPC left rates unchanged at 0.5% for now, the relatively positive evaluation of the economy, and the overall hawkish tone of the meeting, boosted expectations that we could see a rate hike as soon as May. With the MPC stating that monetary policy will "need to be tightened somewhat earlier and by some greater extent over the forecast period than anticipated", the Pound may remain buoyant short-term. While heightened speculations of higher UK interest rates could result in further upside for Sterling, gains may face headwinds down the road. The horrible combination of Brexit uncertainty and political drama at home could obstruct the central bank’s efforts to raise rates. An unfavorable situation where the UK is unable to secure a Brexit transition deal by the March 22-23 EU summit, could trigger uncertainty – ultimately weighing on the prospect of higher UK interest rates.

Taking a look at the technical picture, the GBPUSD staged an impressive rebound from the 1.3850 support level, with prices punching above 1.4000. A solid daily close above 1.4000 could encourage a further incline towards the next levels of interest at 1.4120 and 1.4230, respectively. Alternatively, a failure of prices to keep above the 1.4000 level may invite a decline back towards 1.3850.