Pound could surge to $1.62 if Bank of England starts raising rates later this year

The British pound could surge to levels against the U.S. dollar not seen in nine months if the Bank of England were to start raising interest rates as early as November, analysts said.

Against the dollar, “in some respects, the $1.60 is not too far removed from reality…and there’s no reason why it shouldn’t go up possibly to the highs seen back in October around $1.6150,” if a rate liftoff were to happen in November, said Brenda Kelly, analyst at London Capital Group.

Last Friday, the pound was higher against the greenback and hit a seven-year peak against the euro after Bank of England Governor Mark Carney said that interest rates could rise sooner than expected.

Yesterday, the pound pushed higher against the greenback after minutes from the Bank of England’s July meeting, released Wednesday, suggested policy makers are broadly moving toward raising interest rates. 

The Bank of England minutes released yesterday “showed a small creep further in favor of policy normalization,” UBS Economist David Tinsely wrote in a note.

“Our central call remains the MPC as a body votes to increase rates in November, though data flow will clearly be important as to what side of Christmas the move eventually occurs.”

However, market players generally agree that the hike is more likely to happen in the first quarter of 2016, rather than in November.

“I still think November would be early, I don’t think that’s likely. But certainly if we do see that, that’s where the pound could catch a bid,” said Matt Weller, senior technical analyst at Forex.com.

“As soon as November, we could be looking at the lower $1.60 in the pound-dollar, maybe up to $1.62. That would take some supportive data, some good comments from the Bank of England,” said Weller.

The speculation surrounding the rate liftoff keeps alive the unofficial race between the Bank of England and the U.S. Federal Reserve over which central bank will be the first to lift interest rates after the financial crisis.

The central bank hasn’t raised interest rates since March 2009. Being the first bank to raise rates since the financial crisis, while on some level is symbolic, “will more than likely underpin the pound and send us up toward the $1.61-$1.62 levels,” said LCG's Kelly. 

The pickup in wage growth could push policy makers toward a liftoff. However, policy makers are also facing the prospect that a stronger pound could keep a lid on the inflation outlook as a heftier value of the currency could result in cheaper prices for imports.

The possibility of Britain leaving the European Union and a huge trade deficit are among the headwinds the BoE faces, according to Kelly. But for them, the path toward rate hike is clearer than it is for the Fed, in part because the U.S. is having a general election in 2016.