The pound surged above $1.33 against the dollar after the Bank of England announced its decision to hold rates.
Sterling pushed higher on Thursday ahead of the decision, reaching a high of 1.3276 earlier in the day. After the central bank announced that it would hold rates at 0.5%, the pound pushed even higher to $1.3463.
The Bank of England’s decision was a surprise move, with 80% of market players betting on a rate cut to 0.25%. The central bank indicated that it would cut rates in August during its next monetary policy meeting.
The meeting was the first after the historic Brexit vote that will see Britain cutting ties with the European Union. The meeting minutes suggest a rate cut at the next policy meeting, with most policymakers expecting to loosen monetary policy in the coming month. In the meantime, the central bank will weigh the impact of the referendum vote on the economy.
Early Friday, the pound was trading 0.79% higher against the dollar on Friday, at 1.3444. Sterling has gained 3% thus far, its largest weekly gain in seven years.
Investors and analysts expected the BoE to cut rates to 0.25% from the current rate of 0.5%. The central bank has held rates at this level for the last seven years, but the fallout from the Brexit vote and the impact on the economy is pushing the need for further stimulus to keep the economy afloat.
Mark Carney, Bank of England Governor, has already indicated that monetary easing will be necessary after the June 23 referendum vote that called for Britain to leave the EU. But the BoE said it wanted to wait until it had more data to decide the scale of the action needed to weather the Brexit fallout.
Ahead of the BoE’s decision, the pound found support after Theresa May, Britain’s new Prime Minister, appointed Philip Hammond as the Chancellor of the Exchequer. Hammond will replace George Osborne.
Chancellor Hammond spoke on Thursday of the U.K.’s economy, stating Britain has “taken a shock.” The chancellor said consumers and businesses were not prepared for the outcome of the vote, but vowed to do all that he could to steady the economy and restore consumer confidence.
Hammond has also made it clear that he will not be delivering an emergency budget, as Osborne, his predecessor, had suggested.
The pound’s gains consequently drove the yen lower, which had been steadily gaining strength since the Brexit vote. Investors are patiently awaiting news of further stimulus in Japan after Prime Minister Shinzo Abe’s coalition expanded its majority in a parliamentary election. Fears are beginning to calm, too, which is helping boost risk appetite and beginning to draw investors away from safe havens.
The GBP/USD will likely find support at 1.3239 and resistance at 1.3559. A fall through could potentially push the support level to 1.3035, while a rise through could drive resistance to 1.3675.
Currently, the pair is trading above its 50 Hr and 20 Hr moving averages.
While the pound’s rebound is a positive sign, analysts say it’s still too early for this to be a sustainable rally. Comments from Andy Haldane, BoE committee member, may end the rally sooner than expected. On Friday, Haldane warned that the bank would take “significant” policy action at its next meeting in August.