The pound might experience some volatility today as the Bank of England delivers its August policy decision and Monetary Policy Report. Analysts expect the pound to rise against both the US dollar and euro. At the same time, with many not expecting any major shifts in the bank’s policy, analysts will focus more on Governor Andrew Bailey’s tone and comments for guidance. If the bank strikes a hawkish tone, then the pound might rise, but if it is dovish, then the pound could fall. In general, the market expects interest rates to rise by the end of August 2022, which could help boost the pound, but if a rate increase is pushed back into 2023 then the pound might react by falling.
Scenario 1: Pound could rise
If there are signs that the Bank of England is moving toward ending its quantitative easing programme by the end of 2021 and raising interest rates in 2022, then the pound will find support.
A currency strategist at UBS said: "We are likely to be served a more hawkish tone, but it will likely fall short of any policy announcement. Still, with nearly all restrictions now removed and COVID-19 cases falling back in the UK, we continue to believe sterling should outperform against both the dollar and the euro over the coming months.”
Market analysts also feel that if there are dissenting voices in the Monetary Policy Committee, then the pound could rise as the possibility of an earlier-than-expected reduction of the QE programme could happen in future meetings. Some monetary policy committee members have already hinted that they may support an early end to quantitative easing (QE), especially following the rise in UK inflation. That could help offer support to the pound. The Bank of England could also provide more clarity regarding the ways it will seek to slowly reduce its QE programme, which will also be met as a positive sign. If the bank offers a clear signal that it will assess the size of its QE in each meeting or even better intends to conclude it in the autumn, then this will be clearly bullish for Sterling.
Scenario 2: Pound could weaken
If there is any disappointing news from the Bank, then the pound could weaken. While market expectations have been boosted due to hawkish comments by Bank of England members for a reduction of the BoE’s asset purchase programme, these could be subverted, as the Bank might stress more risks ahead and weak market data. For this reason, the BoE might want to wait and see how the labour market performs and if wage growth is sustainable before they make any rush decisions. This is why the Bank might strike a more cautious tone, as they would like to see more data assessing the status of the economy, especially after the end of the government's furlough scheme in September. Some analysts expect a more hawkish tone in February 2022 when economic activity is expected to be back to normal.
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