Unlike other risky assets, the British pound continues to hold its position against the US dollar, which today failed in pair with the US dollar. Traders do not want to take risks and are nervous about the Bank of England meeting, which will be held this Thursday. The main cause of stress is the discussion of changes in the program to support the economy, which will lead to higher borrowing costs and higher interest rates.
It is already clear that the recovery of the UK economy after the pandemic is quite strong. Rumors that this week the Bank of England policymakers will begin to discuss how and when they can slow down in terms of stimulating the economy will necessarily affect the British pound, which will lead to a severe surge in volatility paired with the US dollar.
As for the technical picture of the GBPUSD pair, to continue the growth from the middle of the channel, it is necessary to protect the large support of 1.3860. Only after that can we expect a recovery of the trading instrument to the area of the maximum of 1.3920, the breakthrough of which will provide a direct exit to the area of the upper border of the channel 1.3970 and the highs of last month 1.4020. If the pressure on the pound persists and we see a breakout of 1.3860, we will have to catch the pound at the lower border of the side channel, which coincides with the base of the 38th figure.
Why the pound may rise
This Thursday, the nine-member Monetary Policy Committee is expected to maintain its bond-buying volume of 150 billion pounds this year. Some investors expect that officials may signal a slowdown in the pace of purchases so that the program will last until the end of the year and not end by November. A slight increase in the volume of bond purchases in the spring of this year led to a slight imbalance, but this was done in connection with the sharp rise in the price of bond yields before the end of the coronavirus pandemic.
If the Bank of England is left unchanged, it will lead to even more talk that Governor Andrew Bailey and his colleagues may very soon focus on when to cancel emergency measures to support the economy. Policymakers will almost certainly update their forecasts for growth and inflation, which will be the starting point. Some economists at the world's leading banks expect that bond purchases will decline slightly, which the market is now quite ready. HSBC believes that a sharper decline in the pace of purchases may be perceived negatively. Bank of America, Mizuho Financial Group Inc., and Credit Suisse expect to announce an adjustment in asset purchases on May 6, which could lead to a sharp rise in the British pound.
If these expectations are not another informational reason to spoil speculators' lives, then it is quite possible to count on the strengthening of the pound by Thursday.
Currently, the Bank of England buys government bonds for 4.4 billion pounds a week. At the current pace, the program will end in early November of this year. It was recently stated by the Deputy Governor of the Bank of England, Dave Ramsden. As for the interest rate, it is now at a record low of 0.1%. The 10-year bond yield is hovering around 0.84%, up from 0.2% earlier this year.
Why the pound may fall
There is also a perception in the market that the Bank of England will not tighten its policy as quickly as investors expect, driving market prices even higher. If traders' expectations are not met on Thursday, and Andrew Bailey takes a wait-and-see position, the pressure on the pound may return. Recent reports and surveys show that the economy is recovering much faster than the Bank of England's most optimistic forecasts made in February this year.
Today's report alone shows how fast the manufacturing sector is recovering. According to IHS Markit, the Chartered Institute of Procurement's Manufacturing Managers' Index & Supply rose to 60.9 points in April from 58.9 points in March, exceeding the preliminary estimate of 60.7 points. The increase is directly related to the easing of prohibitions and the increase in demand. The total number of new orders increased for the third month in a row. Producer confidence has jumped to its highest level in seven years. The optimism stems from the expectation of fewer supply chain disruptions due to COVID-19 and Brexit.
However, forecasts and expectations may be too optimistic. The reluctance to make changes to the current monetary policy on the part of the Bank of England may seriously hit bullish sentiment, which will lead to a downward correction of the British pound is at its peak. During the last meeting, the Bank of England said it would not tighten policy until there are signs of sustained inflationary growth above 2%. Currently, the consumer price index remains below this level, and the last two values were below the forecasts of economists. This a direct proof that the market is oversaturated with optimism, and any decision by the regulator not in its direction will lead to a fall in the pound.
In any case, we may not see any reaction. The trading instrument will continue to balance between the 38th and 40th figures until the publication of new economic reports on the state of GDP, inflation, and the UK labor market for May this year.
Recent statements by British Prime Minister Boris Johnson on the rules of isolation from the coronavirus allow us to count on an active recovery in the summer. Let me remind you that Boris Johnson is ready to lift all restrictions in seven weeks thanks to the vaccination program that was carried out on the territory of Britain in the winter-spring period. During the election campaign, Johnson said that the data on the fight against the coronavirus pandemic would allow people in England to stay overnight with friends or relatives. From May 17, it will be possible to resume the work of bars, restaurants, and other areas of the service sector, which worked with restrictions. During the speech, Johnson also noted that the remaining social distancing rules would be abolished from June 21. However, he warned that international travel would need to be carefully monitored after May 17 to avoid a re-increase in the incidence of COVID.