Sterling surged to its highest level in a week against the euro on Thursday after as many as three members of the Bank of England's policy committee surprised financial markets by voting for a rise in interest rates.
At a time when the BoE has blamed a rise in inflation past its 2 percent target on a weak pound, traders read the split vote as warning that officials could seek to defend the currency with rhetoric or action, even as the economy overall slows. It was also just the latest surprise in a week which has seen the pound slump after British Prime Minister Theresa May lost her parliamentary majority in an early election.
Upsetting London's stock market, already facing a slowing domestic economy, Brexit talks due to start next week and months of political uncertainty around a new minority government, is one risk the BoE would be taking by raising rates. Dominated by companies whose revenues come from abroad, the blue-chip index has benefited from the pound's fall in the past year. Reversing that might hurt.
In addition, for a country with one of the highest household debt burdens in the world, a rate rise would risk triggering falls in housing prices that might leave millions of people with negative equity on long-term mortgages.
The dollar rose to its highest in more than two weeks on Thursday as solid readings on the U.S. economy helped strengthen the case for the Federal Reserve to continue tightening monetary policy this year.
The number of Americans filing unemployment claims fell more than expected last week, suggesting that slack in the labour market was shrinking, and the Philadelphia Fed business conditions index for June beat expectations after a strong reading in May. The Fed has maintained its monetary policy is data dependent, meaning economic reports in line with its outlook are necessary for it to continue raising rates.
The dollar index, which tracks the U.S. currency against six major peers, rose to 97.557, its highest since May 30.
13.30 – USD – Building Permits; Forecast at 1.25M against a previous of 1.23M