Pound Sterling prospects brighten after BoE boosts outlook

• British pound to US dollar (GBP/USD) exchange rate extends gains
• Pound Sterling (GBP) hits ten-month best against the euro (EUR)
• British pound to Australian dollar (GBP/AUD) exchange rate slips on optimistic RBA outlook

Pound Sterling (GBP) is the best performing currency of 2021 thus far, with recent gains fuelled by Bank of England (BoE) policymakers dismissing negative interest rates and the UK’s rapid COVID vaccine rollout.

During Thursday’s monetary policy meeting, the Monetary Policy Committee (MPC) unanimously voted to hold interest rates at 0.1% and leave the BoE’s quantitative easing programme unchanged at GBP 895BN.

Policymakers also delivered a strong signal to foreign exchange (FX) markets that the likelihood of negative interest rates being implemented in the near-future was small.

While the MPC left the door to negative rates open, committee members said this does not mean a rate cut is imminent. Policymakers broadly expect the UK’s vaccination programme to trigger a swift economic recovery in Q2 2021.

With the threat of a no-deal Brexit and negative interest rates removed, coronavirus developments will continue to drive the direction of pound Sterling (GBP) exchange rates.

Furthermore, given that the UK is leading the race to immunisation relative to its European, Australian and US peers, the outlook for the British pound (GBP) has improved markedly, hence the currency’s recent outperformance against its G10 rivals.

British pound on track to secure the fourth week of advances

At the time of writing, the British pound to US dollar (GBP/USD) exchange rate is trading 0.4% higher and near multi-year highs at USD 1.373.

Although the greenback’s recent strength could weigh on the GBP/USD exchange rate, UK vaccine optimism will likely limit pound Sterling’s (GBP) potential for loss.

Meanwhile, analysts forecast further upside in the British pound to euro (GBP/EUR) exchange rate, which has advanced by more than 1% on the week’s opening rate.

The British pound to euro (GBP/EUR) exchange rate rallied to a ten-month high of EUR 1.1443 earlier during the session. While the currency pair has softened heading into the North American session, it appears to have consolidated above the EUR 1.14 level.

The euro (EUR) has come under sustained pressure due to the EU’s laggard vaccine rollout and lockdown extensions across the bloc, which has raised concerns over Eurozone’s recovery outlook.

Although the UK is facing a double-dip recession due to the third national lockdown in England, its world-leading vaccination programme has raised hopes for a robust economic rebound in the second half of the year.

BoE policymakers also said that projected activity is supported by the UK government’s ongoing fiscal packages and monetary policy actions.

European Head of FX Strategy at TD Securities, Ned Rumpeltin said: “We continue to see tactical upside for Sterling in certain crosses following the BoE’s announcement.” He added that those seeking more significant bullish potential should expect to see “further near-term downside in EURGBP.”

That being said, the single currency has traded on the defensive during London trading hours, supported by news that former European Central Bank President Mario Draghi is developing a government to lift Eurozone’s third-largest economy, Italy, out of a deep recession.

Pound Sterling (GBP) could also experience some near-term volatility against the US dollar (USD) as gains against the greenback are proving to be harder to come by amid the recent appreciation in the US currency.

FX markets anticipate a USD 1.9TN stimulus package for the US economy, which as a rule of thumb would be positive for risk. However, it also “increases the chances of an earlier Federal Reserve (Fed) policy normalisation”, says Athanasios Vamvakidis , a strategist at Bank of America, which is supportive of the USD.

The British pound (GBP) has also come under pressure against the Australian dollar (AUD) on Friday, albeit downside isn’t expected to last.

Australian dollar outperforming ahead of AU GDP data

The British pound to Australian dollar (GBP/AUD) exchange rate rallied to AUD 1.8022 in the wake of the BoE’s monetary policy statement – its best levels in over a month.

However, the Australian dollar (AUD) was pushed higher across the board after the Reserve Bank of Australia (RBA) delivered a relatively optimistic view of the Australian economy’s recovery prospects for 2021.

The news helped investors overlook the fact the RBA expects inflation levels to remain depressed until mid-2023 and the country’s slower vaccine rollout. The British pound to Australian dollar (GBP/AUD) exchange rate retreated to AUD 1.7919 following the announcement and remains near the lower end of today’s range.

The “Aussie” dollar could extend gains next week if the National Australian Bank (NAB) Business Confidence Index climbs higher, and Westpac’s Consumer Confidence report strengthens, as this could boost optimism over Australia Q1 recovery outlook.

That being said, a stronger US dollar (USD) and strong signals that China is pulling back on its reliance for Australian commodities could trigger some fresh selling pressure in AUD exchange rates.

However, pound Sterling (GBP) is also exposed to some substantial risks next week as FX markets brace the release of Q4 gross domestic product (GDP) data, Business Investment Sentiment, Manufacturing Production and Industrial Production figures.

Suppose the UK economy slipped into negative territory in Q4. In that case, this will heighten fears over Britain entering a double-dip recession, which, in turn, would limit any upside potential in GBP/AUD.

Having said that, as FX markets are forward-thinking by nature, GBP could avoid a sharp decline if the UK hits its COVID-19 vaccine target next week as this will likely increase hopes that the UK economy will bounce back in Q2.