Pound soars above $1.35 after speech from MPC's Vlieghe

The pound has surged after Bank of England policymaker Gertjan Vlieghe reinforced the message that interest rates could rise before the end of the year.

In a speech on Friday morning, Vlieghe, an external member of the Monetary Policy Committee who a day earlier had joined the vote to keep rates on hold, said rates could rise “as early as in the coming months”.

Sterling spiked to 1.359 against the dollar for the first time since the Brexit referendum, and gained 0.9% on the euro to 1.1339.

The MPC on Thursday significantly stepped up its hawkish rhetoric, signalling that it was nearing the time to raise rates and stating that there is now a majority of members who judge "some withdrawal of monetary stimulus was likely to be appropriate over the coming months".

Speaking in London as part of the Society of Business Economists' annual conference, Vlieghe further pressed home the point.

"For now, it seems the net effect of the many underlying forces acting on the UK economy is that slack is continually being eroded and wage pressure is gently building," he said.

"If these data trends of reducing slack, rising pay pressure, strengthening household spending and robust global growth continue, the appropriate time for a rise in Bank Rate might be as early as in the coming months."

This sent the pound soaring and also therefore hit the FTSE 100 index, which often moves in the opposite direction as so many of its constituents benefit from overseas earnings. The London benchmark index was down 0.66% to 7,247.06 just after 1000 BST.

Analyst Naeem Aslam at Think Markets said the GBPUSD trading had been "ballistic" and that the market has now "woken up" to the reality that rates are likely to be hiked soon.

This was more than just a bear squeeze, said analyst Neil Wilson at ETX Capital. "Doubters about the Bank of England's willingness to raise rates soon were disabused of their views as Gertjan Vlieghe morphed from arch-dove to a hawk."

His comment that rate rise may be appropriate in the "coming months" has been taken by market "to mean a quarter point hike is on its way, probably by the end of the year".

Wilson added that Vlieghe's metamorphosis highlights how the internal MPC pressures are building rapidly towards a hike in interest rates, "though not quite the start of a tightening cycle as we understand them necessarily, but at least a 'correction' to the Bank's cut last August".

He said now that $1.35 has been breached momentum traders could take it further upwards. "However with the Fed ready to reduce its balance sheet and US inflation once again indicating another rates there may rise again, gravitational forces will start to work on the cable soon again. Meanwhile Brexit remains the great unknown."