UK's pound stays close to 4 - month high after Bank of England sets out monetary policy

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LONDON, Aug 6 - The pound was steady on Friday, holding close to the four-month high it reached on Thursday against the euro after the Bank of England set out plans for how it would tighten monetary policy.

The central bank's message was slightly hawkish: the monetary policy committee voted 7 - 1 to maintain the pace of its government bond-buying, even though it expects inflation to increase by 4.0% around the end of the year. But it also declared that some modest tightening of monetary policy over its three-year forecast period was likely to be necessary.

Because the hawkish shift was expected, sterling did not react significantly to the news. But analysts added that it helped to reinforce its strengthening trend.

The British currency has been a strong performer in recent weeks as COVID - 19 cases - while still high - have been reduced and high vaccination rates have allowed the British government to lift most social distancing rules.

At 0756 GMT on Friday, it was little changed against the dollar at $1.3925, up 0.2% on the week as a whole.

Versus the euro, it was flat at 84.95 pence per euro, with the week as a whole made up around 0.5%. Earlier in the session, it touched 84.90 pence per euro, which was the strongest pound in four months.

The central bank's messaging may be a giant step for the BoE, but it is a tiny leap compared to ECB communication and wrote ING FX strategists in a client note.

With BoE's finger now on the trigger - any better UK data could start to see an outsize reaction in GBP as BoE tightening expectations are brought forward.

Futures, investors said were pricing in a first 15 basis-point rise to take BoE's benchmark bank rate to 0.25% in May next year. Just before the announcement by the central bank, futures of rates on Thursday (August 2022) pointed to a hike in rate futures.

MUFG analyst Lee Hardman said the BoE's hawkishness reflects the hope that the UK economy will recover strongly from COVID - 19. He expects BoE and European Central Bank policy paths to diverge.

We are trading a fresh EUR GBP quote in anticipation that the pair will fall to short year lows.

In June, British house prices rose in July after falling in June as demand for larger homes following pandemic lockdowns helped soften the impact of a reduced tax break to buyers, mortgage lender Halifax said.

Ms forex markets were mostly quiet ahead of U.S. employment data due later in the session. Traders expect strong numbers which could make the case for faster U.S. policy tightening.