FX Focus: Pound plunges after Bank of England keeps interest rates on hold

The pound plunged on Thursday (2 February), after the Bank of England held the UK's benchmark interest rate at 0.25% at the conclusion of its latest Monetary Policy Committee (MPC) meeting.

Sterling had hit $1.2692, its highest level since 14 December, ahead of the decision before falling sharply shortly afterward. By early afternoon, the UK currency was 0.68% lower against the dollar, trading at $1.2566, and fell 1.15% against the euro, fetching €1.1613.

"It was a classic case of 'buy the rumour, sell the news' type of a reaction, although some would argue that the BoE sounded a little more dovish than expected," Fawad Razaqzada, market analyst at Forex.com said of the pound's reaction to the BoE's decision.

The BoE also added the UK economy in 2017 will grow more than originally expected, allaying fears the impact of the Brexit referendum would hold back economic expansion. Britain's GDP is now forecast to grow 2%, compared with the 1.4% rate it predicted in November.

FXTM Research Analyst Lukman Otunuga, explained markets were expecting the BoE to tilt to the hawkish camp amid the accelerating inflation but the central bank seemed to be in no rush to take action and such has left sterling bullish investors empty handed.

"Uncertainty still remains the name of the game when dealing with the pound with further sell-offs likely as anxiety mounts ahead of the Article 50 invoke in early March," he said.

"Although the parity dream on the pound/dollar may be pushed back in the longer term, the Brexit woes have made Sterling a seller's dream."

Elsewhere, the dollar remained under pressure as the threat of Donald Trump implementing protectionist policies showed no signs of abating. The US currency was 0.74% and 0.44% lower against the yen and the euro respectively, buying ¥112.41 and 0.9247 euro cents. The dollar was also sharply lower against the Swiss franc, falling 0.48% to CHF0.9883, and declined 0.38% 1.39% against its Canadian and Australian counterparts respectively.

The greenback's struggle was exacerbated by the Federal Reserve's decision to keep interest rates on hold. The US currency tends to gain ground when the US central bank adopts an aggressive stance, but on Wednesday evening it held fire in its first meeting of the Trump era.

The US central bank said it "expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace."

"While this wasn't a surprise there also wasn't any discernible shift in tone from the statement in December, which would indicate that the prospect of a March move on rates is not on the table at this time," said Michael Hewson, chief market analyst at CMC Markets.