The pound fell against the euro and US dollar ahead of Thursday's Bank of England policy meeting. The fall is a result of investors’ belief that the pound will fall further. More generally, the third wave in Covid-19 infections and the slowdown in business activity has not helped boost market sentiment. If the bank strikes a cautious tone, market analysts believe that the pound might suffer.
Bank of England
Markets are expecting the Bank to keep interest rates and its quantitative programme the same, without making any major changes to its policy. But, it is also expected to readjust its economic forecasts and provide further guidance about the end of its quantitative easing programme while also offering a general outlook for interest rates. Thursday’s policy update coincides with the release of the quarterly Monetary Policy Report which will possibly shed some more light on when a 2022 interest rate rise will happen.
If the quantitative easing programme is reduced or there is a larger than expected increase to the BoE's inflation projections, the pound could get a boost. The latter will increase the possibility of a rate increase much earlier than expected. In general, if the bank provides more clarity on how it will begin cutting down its stimulus programme, then the pound will most likely rise.
Bank of America analysts are very hawkish and positive and expect the Bank of England to raise interest rates to 0.25% in May 2022. If the bank does signal a rate rise for 2022, then the pound could rise higher.
Outlook for pound
For economists and analysts, buying Sterling with the expectation that it will rise is something that makes sense, despite the dissenting voices of some of the bank’s members. While getting the economy back and running to pre-pandemic levels might take a while, the path towards normalisation seems clear. The pound’s path, however, might find possible obstacles if the US dollar rises.
Other analysts, believe that the fundamental backdrop remains unsure for Sterling and that any gains are short-lived, as they remain cautious.
Economists at HSBC do not expect any major shifts at the Bank of England’s meeting on Thursday, so the GBP/USD pair may experience some downside pressure. According to them, the cautious tone of the bank will hurt the pound. They said: “The GBP remains somewhat attuned to global risk appetite and so may see its fortunes partly determined by this factor, but local drivers seem to be getting more dominant and suggest further depreciation pressure over the near term. Given the rapid spread of the COVID-19 Delta variant, the removal of most remaining restrictions on 19 July has failed to provide the GBP with a boost. At the Bank of England’s (BoE) meeting on 5 August, a cautious tone (warning against the dangers of premature tightening) is likely to be prominent, as uncertainty remains high and most policymakers view the inflation upswing as temporary. The rates market prices in a 15bp hike in May 2022 for now, and so if the BoE repeats its cautious tone, this may pose some downside risks to the GBP.”
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