FX focus: Pound soars against euro and dollar after Bank of England shocks investors

The pound soared on Thursday (14 July) after the Bank of England (BoE) caught investors and economists by surprise as it opted to kept interest rates unchanged.

Britain's central bank had widely been tipped to cut rates for the first time in seven years in its first meeting after the pro-Brexit vote, but instead signalled its intention to sit tight for now. However, Threadneedle Street officials hinted more stimulus could be on its way next month, possibly as a "package of measures".

The pound soared following the announcement, gaining 1.64% against the dollar and 1.12% against the euro, exchanging hands at $1.3357 and €1.1984 respectively. However, David Lamb, head of dealing at FEXCO Corporate Payments, warned that "few will see this [the pound's sharp upward spike] as much more than a temporary respite."

Some analysts were left disappointed by the decision, indicating the BoE will now have to deliver decisively in August.

"Presumably, the reason most Committee members decided not to act today was to allow greater time to assess the likely effects of the UK's vote to leave the EU in the August Inflation Report, which is just three weeks away," said Jonathan Loynes, chief European economist at Capital Economics.

"The relative calmness of the market response to the referendum has perhaps given it the breathing space to do so. But it seems unlikely that the outlook will be a great deal clearer by then."

Ian Stewart, chief economist at Deloitte, added: "This is a surprise, but it looks like one of tactics not strategy. The MPC wants to see more data and have more time to think through its response. But the Bank has signalled an easing of policy in August.

"Yet the fundamental challenge – the nature of the post-EU economic settlement – lies outside the Bank's control. Providing clarity and confidence on that is the government's central task."

Elsewhere, the euro was 0.49% higher against the dollar, while the yen tumbled against the latter, with the greenback climbing 1.18% to 105.72 amid speculations the Bank of Japan (BoJ) will further loosen its monetary policy.

"There's considerable uncertainty about the policy outlook, but BoJ easing plus half-decent US data could give drag the yen a lot lower in the weeks to come," said said Kit Juckes, global head of FX strategy at Societe Generale.