The pound hit a two-week high against the dollar on Thursday (16 March), after the Bank of England (BoE) kept interest rates unchanged, as was widely anticipated.
Sterling rose sharply after the decision and, by early afternoon, it was trading 0.54% and 0.62% higher against the dollar and the euro respectively, exchanging hands at $1.2357 and €1.1518. The gains were particularly significant given the pound had endured an 11-day losing streak earlier this month, but Fawad Razaqzada, market analyst at Forex.com, warned the feel-good factor might be short-lived.
"With the UK set to start the process of leaving the EU in the coming days, and Scotland potentially on the verge of holding a second independence referendum, uncertainty remains high which could limit the gains for the pound," he said.
"That being said, much of the negativity is already priced in."
The BoE held the UK's benchmark interest rate at 0.25% at the conclusion of its latest Monetary Policy Committee (MPC) meeting, as MPC members voted 8-1 in favour of keeping the interest rates unchanged, with Kristin Forbes the only dissenter.
However, with Forbes set to leave the MPC in June, analysts warned against expecting any immediate change to the Bank's stance.
"Given the considerable degree of uncertainty surrounding the economic outlook, it still seems unlikely that the MPC will follow the US Fed and raise rates anytime soon," said Ruth Gregory, UK economist at Capital Economics. "A rate rise towards the end of 2018 seems more likely to us – provided that growth remains relatively resilient as we expect."
Across the Atlantic, the dollar was largely flat, after the Federal Reserve hiked interest rates for the second time in three months, as widely expected by economists, but adopted a softer stance than expected. The greenback was broadly unchanged against the yen, the euro and the Canadian dollar but fell 0.25% against the Swiss Franc to CHF0.9977.
The US central bank raised the target range for the federal funds rate to 0.75% to 1% and Fed Chair Janet Yellen said that the rate rise was based on current information, and was not a "pre-emptive response" to future policy moves. While this move was widely expected, many market participants were positioned for a more hawkish language and an upgrade in economic projections which didn't happen.
"Yesterday's hike can be described as a "dovish hike" or "neutral" at best," said FXTM research analyst Lukman Otunuga. "The little tweaks in the statement and economic projections suggest that the economy is still moving on the right path, but there's no evidence of overheating economy."
Crucially, the Fed did not revise its economic estimates, leaving inflation forecasts unchanged at 1.9% for 2017, while the GDP forecast for 2018 was revised slightly higher by 0.1%. Most importantly, the Fed signalled only two rate hikes remain for the rest of the year.
Michael McCarthy, chief market strategist at CMC Markets, said: "Expectations that the Fed would lift its economic estimates in light of the new administration were dashed. This confounded those expecting a more hawkish stance, and saw an immediately sell down of the currency."