Non-event? GBP/USD has hit the highest since March, showing that the Bank of England’s decision is included powerful punches, propelling the pound.
Here are three factors that are sending sterling higher:
1) No negatives is a positive
All nine members of the Monetary Policy Committee – including several previously outspoken doves – voted to leave interest rates unchanged. Te specter of sub-zero borrowing costs previously weighed on sterling.
Andrew Bailey, Governor of the Bank of England, said that such a move is “under active consideration” but then hinted it is not imminent. The fresh unanimous vote seems to put the nail in the coffin of negative rates, which would have weighed heavily on the pound.
2) Upgraded forecasts
The British economy is still set to contract in 2020 – COVID-19 is taking its toll. Nevertheless, this decline has now been trimmed to single digits – 9.5% against 14% beforehand. That is a substantial upgrade.
While the BOE also trimmed growth forecasts for the next two years – a slower recovery – it is hard to foresee too far into the future given the high uncertainty surrounding the virus. Moreover, Britain exits the Brexit transition period in 2021 and without a new accord, everything is uncertain.
3) Short-term optimism
While looking six months into the future is hard, the recent past is easier to assess. The “Old Lady” is getting up to speed with high-frequency figures and states that higher frequency indicators imply a rebound in spending.
That sentiment echoes the words of Chief Economist Andy Haldane, who said “so far, so V” when talking about the recovery. The BOE is wary of new outbreaks but seems to opt for the glass half full.
GBP/USD implications
Pound/dollar has hit a daily peak of 1.3183 – the highest since March – before consolidating its gains. Cable may continue higher after the BOE’s upbeat message, potentially breaking above 1.32, thus reaching levels that were last seen in February.
The next significant moves depend on the disease – which remains the boss.
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