Sterling Bid following BOE

GBPUSD, H1

The Pound has outperformed on the BoE’s guidance, which gave a cautiously optimistic take on the outlook, stating that the lockdown-induced downturn is less severe than initially foreseen. Cable posted a new five-month peak at 1.3184, while EURGBP fell nearly 0.5% to a two-day low at 0.9000. The Pound has also gained about 0.5% versus the Australian Dollar, and is up on the Yen and other currencies, too.

The BoE left the repo rate at 0.10% and asset purchases totals unchanged, as had been widely anticipated. While the statement highlighted the likely sharp decline in Q2 activity levels, with GDP seen down around -20% y/y, it also noted the rebound in more timely higher-frequency indicators and a pick-up in housing market activity, and said that it expects a rebound, albeit gradual, in business investment. The BoE still cautioned that the unemployment rate is projected “to rise materially, to around 7.5% by the end of the year,” and stated it remains committed not to tighten policy “until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably”. The warily more upbeat BoE comes with forex markets factoring in better odds for an EU-UK trade deal, with a number of recent sourced UK press reports suggesting that discussions are going better than the official line suggests. A new lockdown in the economically-important Manchester area, and Aberdeen in Scotland, along with the continued media-driven “feardemic,” is to an extent clouding the horizon at a time when government pandemic business support measures have started to unwind (compensation for furloughed workers was reduced this week).

Earlier, BOE Governor Bailey talked of negative interest rates being available and, in the toolbox, but “please don’t think we are about to use them…. that is not the current plan”.

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