The Bank of England’s Monetary policy
The British pound has one of the highest trading volumes in the world, trailing only the U.S dollar, Euro, and Japanese Yen in daily volume. The British pound accounts for roughly 11% of the daily trading volume in foreign exchange markets.
With the GBP/USD being one of the most traded currencies globally, most traders are questioning how the Pound is going to react to a “double crisis”. The UK as of the 1st February 2020 has stepped into the unknown (Brexit), and a month later was hit by the global Covid-19 Crisis.
Many economists including Mark Carney, the ex-Governor of the Bank of England, have previously advised the Pound is likely to depreciate after Brexit. With all countries experiencing a high economic shock, the aftermath of which traders are yet to witness. This leaves most investors asking themselves: what do I need to know about the Pound? Well, the most important event to start with is Thursday’s Bank of England policy announcement, based on the new economic conditions.
Bank of England – Let’s assess the Damage
Bank of England policymakers will meet this Thursday knowing that they’ll probably have to do more to combat the U.K.’s economic slump. With the government all but certain to ramp up spending to save jobs and keep businesses afloat, the new Governor, Andrew Bailey, may signal he’s willing to buy more debt to keep borrowing costs from rising.
At the current pace, the Central Bank will hit its current bond-buying goal around the end of June. However, even with debt remaining low the economy is still likely to stay slumped without further economic stimulus to return the economic growth on its tracks.
In their policy decision on Thursday – a rare early morning one that includes a financial stability report – officials will also likely lay out multiple paths for growth and inflation based on how long the lockdown lasts. They will highlight the risk of economic “scarring” that they are especially eager to avoid.
This will be the bank’s first formal forecast round since the pandemic struck the U.K, modelling the future being even harder than usual. Publishing scenarios is an approach taken by the European Central Bank, which said the euro-zone economy could shrink by 5-12% this year, fully recovering either next year or only as late as 2022.
GBP/USD – Analysis
At the end of last week, the GBP/USD pair strengthened amid US President Donald Trump’s intention to re-unleash a trade war with China. Trump accused it of hiding information about the coronavirus, adding that he has confirming evidence that supports Washington threatening Beijing with new duties. However, a trade war during a pandemic carries huge global risks, and Trump’s rhetoric is likely due to the desire to strengthen positions before the presidential election.
Additional pressure on the Pound was formed before the meeting of the British monetary policy regulator and the publication of the 1st Quarter inflation report. With a high degree of probability, the Bank of England will lower economic forecasts, as the Brexit, pandemic and the added economic difficulties do not leave the regulator with options for manoeuver.
Britain introduced restrictive measures later than other European countries, which puts it in a position where it will also quit quarantine later. The head of the country’s Ministry of Health said that the measures of social distancing could be kept until the end of the year.
Despite the fact that Covid-19 has somewhat overshadowed the issue of the EU-UK divorce, it continues to be a factor of the weak Pound. Negotiations have stalled due to disagreements over the EU’s access to Britain’s fishing waters. If countries fail to agree before June, this will essentially mean leaving the EU without a deal.
Now as Thursday approaches, we can see there is a lack of volatility due to the market waiting for the Monetary Policy announcement. Following the release, there is likely to be an increased level of volatility based on the Governor’s comments and advice.
It is important for traders to watch the announcement. It can be viewed on the BBC channels, Youtube or Bloomberg in order to make their own interpretation on the outlook of the British Pound.