LONDON: Sterling's rise against the dollar in the wake of the Bank of England's new "forward guidance" on monetary policy may have some room to run but factors favouring the greenback may cap the pound's rally.
The BoE said on Wednesday it planned to keep interest rates at a record low until unemployment fell to 7 percent and that that could take three years. Investors though, brought forward expectations for when rates would rise, pushing sterling to its highest against the dollar since June 19.
All well and good but sterling alone does not determine the value of the pound against the greenback.
It is very possible that on the dollar side, the Federal Reserve will start to reduce its massive bond-buying stimulus later this year and, depending on the economic data, could do so as early as next month. That ought to be dollar-positive.
Already this week two senior US central bank officials, Richard Fisher of the Dallas Fed, and Dennis Lockhart from Atlanta, have signalled a September pullback on Fed bond purchases is possible.
On Tuesday, Charles Evans, Chicago Fed chief and normally amongst the most dovish Fed policymakers, said he would not rule out such a move in September.
Although Fed President Ben Bernanke is not attending this year's annual Jackson Hole central bank conference in late August, traders will still be looking for hints as to the US central bank's monetary policy intentions.
Should they come to the view that the Fed is set to scale back its monetary largesse in September even as the Bank of England pre-commits, albeit with caveats, to years of record low interest rates, sterling's strength could quickly drain away.
The pound might forge higher in the short term, following the BoE's announcement, possibly even testing its 55-week moving average at $1.5643, but many traders might prefer to sell this rally in expectation that the Fed will make a move in September.
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