Forex Market: GBP/USD trades little changed after Bank of England leaves borrowing costs on hold

The pound traded little changed against the US dollar, following Bank of England’s decision to keep its benchmark interest rate and asset purchase facility program unchanged in March.

Having reached a session high at 1.6750 at 14:01, GBP/USD trimmed earlier gains to trade little changed at 1.6711 at 12:44 GMT, losing 0.06% for the day. Support was likely to be received at March 5th low, 1.6658, while resistance was to be encountered at March 3rd high, 1.6751.

Bank of England’s Monetary Policy Committee (MPC) reported today that it will keep its benchmark interest rate unchanged at a record low 0.5%, where it has been since March 2009. The MPC also decided to leave its quantitative easing program of monthly asset purchases unchanged at 375 billion pounds (approximately 627 billion US dollars). Central banks officials also announced that they would reinvest 8.1 billion pounds of funds related to the plan starting March 10.

“There’s very few expectations for the meeting,” Michael Sneyd, a currency strategist at BNP Paribas SA in London, commented in a Bloomberg interview yesterday, before BoEs report. “We still like sterling and are currently looking for opportunities to put long positions back on. The data flow has been very solid and that should keep the pound supported.”

The pound received support yesterday, after the Chartered Institute of Purchasing and Supply (CIPS) reported that activity in the UK services sector expanded at a faster-than-projected pace in February, adding to evidence the economy is gaining traction. The corresponding PMI came in at 58.2 in February, while analysts had predicted the index to decline to 58.0 from 58.3 in the previous month. Values above the key level of 50.0 are indicative of expansion in activity. February’s reading was the weakest since June, but the slowdown can be attributed mainly to heavy flooding in many regions of the UK, which experienced unprecedented amounts of rainfall last month.

Last week, a report by the UK Nationwide Building Society revealed that home prices rose 0.6% in February, capping a 14th month of advances and after January’s reading was revised up to a 0.8% increase from initial estimate of 0.7%. The average value of UK homes reached 177 846 pounds or approximately $296 000 this month, which is a 9.4% increase from a year ago. Analysts had projected that house prices will rise by 9% in February, after a 8.8% gain in the previous month. The boost in the UK property market was mainly driven by low borrowing costs and easier availability of loans for home purchases.

In its quarterly inflation report last month, Bank of England revised its forward guidance, replacing the 7% unemployment threshold with a range of economic indicators, including spare capacity and said it intended to maintain the stock of purchased assets at least until the first increase in its benchmark rate.

The central bank also raised its forecast for the UK economic growth in 2014 to 3.4% from 2.8% projected in November and predicted the first increase of interest rates will come in April 2015. Bank of England projected inflation of 1.9% in the next three years, below the central bank target of 2%.

BoE said the unemployment rate will probably fall below 7% in the first quarter of this year, but at the same time underscored there was “scope to absorb spare capacity further before raising bank rate” from the current record-low 0.5%. BoE estimated an output gap between 1% and 1.5% of UK gross domestic product.

The sterling has advanced 13% in the past year, being the best performer of 10-developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, while the US dollar rose mere 0.9%.

Meanwhile, greenback’s demand was pressured yesterday after Automatic Data Processing reported that companies operating in the US private sector added 139 000 new jobs in February, defying analysts’ projections of an increase to 158 000 and after January’s reading was revised sharply downward to 127 000 from earlier estimates of 175 000 added workers.

Also fanning negative sentiment, activity in the US sector of services grew at the weakest level since August 2010, with the corresponding PMI coming in at 51.6 in February, down from 54.0 in the previous month and confounding analysts’ expectations of a smaller decline to 53.5.

However, the Institute for Supply Management reported on Monday that manufacturing activity in the United States expanded at a faster than projected pace in February. The corresponding PMI advanced to a reading of 53.2 last month from 51.3 in January, while analysts had expected that the index will climb less, to 52.0 in February. Values above the key level of 50.0 are indicative of expansion in activity.

Elsewhere, USD/JPY hit a session high at 102.81 at 08:07 GMT, after which consolidation followed at 102.77, adding 0.46% for the day. Support was likely to be received at March 5th low, 102.11, while resistance was to be met at February 21st high, 102.83.