BoE rate decision sets the tone for pound Sterling

• Pound Sterling (GBP) forecast to gain in the near-term following Bank of England (BoE) rate decision
• Bank of England (BoE) raises economic forecasts
• London’s FTSE 100 Index closes higher following BoE meeting
• After an initial rally, pound Sterling (GBP) retreats in FX markets with the Scottish vote in focus

The Bank of England (BoE) policy meeting will more than likely determine the direction of pound Sterling (GBP) exchange rates over the coming month.

Ahead of the BoE rate decision, the British pound to euro (GBP/EUR) exchange rate was trading towards the EUR 1.16 level, while the British pound to US dollar (GBP/USD) currency pair was trading sideways between USD 1.3902 and USD 1.3919.

While BoE rate-setters were optimistic about the UK’s recovery outlook and occupied a relatively hawkish stance, the British pound (GBP) has failed to hold onto its post-BoE meeting gains.

It seems that investors are now focusing on the outcome of the Scottish elections, which could mark another step in the push for a second independence referendum.

Although some analysts had said that it’s unlikely that the Scottish vote will significantly impact pound Sterling (GBP) exchange rates, another Scottish independence referendum could cause GBP to struggle to reach pre-Brexit levels.

However, given that the BoE meeting was relatively hawkish, and the UK remains set to go ahead with its penultimate round of lockdown easing, pound Sterling (GBP) weakness could be temporary.

While the Bank of England (BoE) did not perform a rate hike, policymakers did upgrade UK growth forecasts by a considerable margin, boosting hopes of a robust vaccine-fuelled recovery in the country.

BoE leaves interest rates unchanged but upgrades economic growth projections

The BoE opted to leave interest rates unchanged at their COVID-19 crisis low of 0.1% and its quantitative easing programme at GBP 895BN – widely expected by most foreign exchange (FX) market participants.

However, policymakers said they expect the UK’s vaccine-fuelled recovery to boost economic growth faster than expected.

It may come as no surprise to some, as the UK has been a world leader in the race to COVID-19 immunisation. Still, given that Britain suffered the sharpest economic downturn in over three centuries, the country has shown remarkable economic resilience.

According to the BoE, they now predict UK output to expand by 7.25% in 2021, up from previous estimates of 5%.

The central bank said the smaller-than-expected contraction in Q1 influenced their decision to revise growth forecasts, with total output in three months to March falling by 1.5% against expectations for a 4% drop.

Policymakers also said momentum was driven by the success of the UK’s vaccination programme and the measures announced by Chancellor Rishi Sunak during his March Budget statement.

Although Britain’s vaccine campaign slowed down in April, the country’s rollout has accelerated rapidly in the past week. According to GOV.uk, 51,225,890 COVID jabs have been administered across the UK, with 25% of all British adults fully vaccinated.

Despite minor setbacks to the vaccine rollout due to issues with the India AstraZeneca plant, the UK remains on track to meet the roadmap set out by Prime Minister Boris Johnson and offer vaccines to all adults by July-end.

UK recovery in full steam ahead says BoE

With restrictions on domestic activity expected to be absent for the remainder of the year, BoE policymakers are confident the UK gross domestic product (GDP) will return to pre-pandemic levels by the end of 2021.

The central bank also predicts a mini spending boom in 2021, given that a total of GBP 192BN in household savings has been accumulated due to COVID-19 lockdown restrictions.

IHS Markit has already noted sharp increases in business and consumer spending over the past month, with its Purchasing Managers’ Index (PMI) coming in at 61 in April, up from 56.3 in March.

Optimism towards Britain’s economic recovery outlook is also being reflected in London stock performance. London’s blue-chip FTSE 100 Index closed 0.5% higher or by 36.87 points today at 7,076.17.

However, BoE Governor Andrew Bailey has warned of the potential downside risks amid increased reports of COVID-19 mutations. He also said it was too early to judge the impact of Brexit on the UK economy, which appears to have rattled some investors.

Outgoing Chief Economist Andy Haldane remained optimistic, stating there is “clear evidence that output is snowballing, with both household and business spending surprising significantly and persistently to the upside”.

Official UK GDP figures for Q1 and March will be published next week; however, Mr Haldane said that he is confident that a robust recovery is on the cards given recent economic indicators.

Policymakers also revised unemployment projections, with joblessness in the UK now expected to peak at 5.5% against the previously forecast 7.75%, courtesy of the furlough extension.

The BoE’s more upbeat forecasts coincide with the ongoing easing of coronavirus restrictions, with the next round of easing set to commence on May 17th.

From May 17th, the rule of six will be applicable indoors, parties of thirty can gather outside, and all indoor hospitality venues can reopen their doors.

During the BoE meeting, policymakers also praised Chancellor Rishi Sunak’s new “super deduction” for qualifying capital allowances, stating that the measures will help to reduce long-term economic scarring by encouraging investment.

The upbeat forecast also fuelled hopes for an interest rate rise next year, while market analysts widely expect inflation to hit the central bank’s 2% target in two years.

One economist said that the BoE has already taken the first step towards tapering by slowing the pace of its asset’s purchases.

Yet, despite the euphoric music mood, BoE expectations for the UK economy have had minimal impact on pound Sterling (GBP) exchange rates.

After a brief move higher, the British pound (GBP) has slipped against its two major currency rivals, the US dollar (USD) and the euro (EUR).

GBP/USD and GBP/EUR come under pressure in FX markets

It’s been a noisy day for the British pound (GBP), with investors focusing on two key risk events on “Super Thursday” – the BoE meeting and the Scottish elections.

Although the UK currency has traded back and forth for most of Thursday’s session, we saw some whipsaw price action heading into New York trading hours.

The British pound to euro (GBP/EUR) cross has tumbled by 0.5% to EUR 1.1524 despite some selling bias around risk-off assets.

Although the announcements made during the BoE meeting should prove pound-positive in the medium term, GBP/EUR and will likely remain under pressure until the Scottish election ballots are counted.

The euro (EUR) has also found some support in the wake of better-than-expected German factory orders for March despite the latest German Construction PMI revealing that activity in the sector has fallen into contraction territory.

A lack of demand for the greenback has prevented steep losses in the British pound to US dollar (GBP/USD) exchange rate, which managed to attract some dip-buying earlier during the session and rally to a weekly high of USD 1.394.

GBP/USD is currently trading 0.1% lower at USD 1.3888 and could remain relatively depressed with GBP pulls reluctant to place any new bets ahead of the Scottish vote.

On Friday, pound Sterling (GBP) traders will be eyeing the latest IHS Markit Construction PMI and updates on the Scottish election, both of which could push the UK currency higher on a favourable outcome.

EUR traders will be taking cues from German industrial production data, which is forecast to return into expansion territory as the coronavirus situation in the Eurozone’s largest economy improves.

Any fresh impetus in US dollar (USD) exchange rates will be driven by US labour market data on Friday.