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Will Bank of England's decision support or hinder the pound's growth?

Will Bank of England's decision support or hinder the pound's growth?

The British currency is currently faced with the most important question: How will its dynamics be influenced by the regulator's recent decision? At the moment, the pound is fluctuating between a temporary growth and another decline, trying to consolidate.

The pound's current action, which is looking for a benefit in the decision of the regulator and seeks to enter an upward trend, does not allow it to find the desired balance. According to analysts, its dynamics is far from stable. At the end of this week, the GBP/USD pair is dominated by downward trends, although there were enough reasons earlier to be positive.

On Thursday, it can be recalled that the Bank of England reported a slowdown in the pace of bond purchases, while sharply raising the current forecast of UK economic growth for this year. Against this background, experts highlighted that the pound declined against the dollar. This downward trend was supported by the preservation of the base interest rate at the level of 0.1% on the part of the regulator.

With regard to the growth forecast of the national economy, the Bank of England remained true to the positive trend. This year, the regulator expects growth to 7.25%, which is much higher than in February (up to 5%). At the same time, the Bank of England left its bond-buying program at the same level (895 billion pounds, or $1.24 trillion), in line with experts' expectations. At the same time, the regulator stressed that from the end of May to August 2021, it will slow down the purchase of state bonds to 3.4 billion pounds per week, compared with the current rate of 4.4 billion pounds per week. The Central Bank of England stressed that the national economy is moving at a confident pace towards a stronger recovery than previously expected. A number of factors contributed to this, primarily the timely mass vaccination against COVID-19.

The pound increased immediately after the BoE meeting and maintained a short-term optimism. However, experts recorded a decline in the morning, which continued towards the end of the week. Last night, GBP sharply fell against the USD to 1.3871 from the previous 1.3903. On Friday morning, there was a slight improvement in the situation. This instrument was trading in the range of 1.3908-1.3909.

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Will Bank of England's decision support or hinder the pound's growth?

The Bank of England's next meeting did not disappoint the market, as many expected the "hawkish" decisions that were announced. But according to analysts, the sell-off of GBP, which followed immediately after the regulator's statements, demonstrated that something more is needed to fully meet the "hawkish" expectations. Some economists believed that the reduction in asset purchases was offset by the extension of the QE program. In general, these expectations were met: from May to August, the pace of purchases will decrease by 1 billion pounds per week, and then the Central Bank of England will look at the situation and possibly, make a new decision on this issue.

In terms of inflation level, the Bank of England shares the Fed's point of view, emphasizing that its growth is a temporary phenomenon, so there is no need to raise rates. In the short-term planning range, the regulator expects inflation to rise above the 2% target by the end of 2021. However, experts believe that such changes will not affect the situation too much. According to preliminary forecasts, UK inflation will return to an unchanged 2% in the medium term. At the same time, the BoE leaves itself room to make a move, although it does not intend to tighten monetary policy until there are clear signs of economic progress and the target inflation rate of 2% is reached.

The economic and political situation negatively affects the pound's dynamics. It constantly has to make a choice in favor of decline or growth, and attempts to consolidate in the upward trend are often unsuccessful. Nevertheless, it hopes to take revenge in the medium and long term. Wells Fargo Securities analysts agree with this, believing that the current decision of the Bank of England will lead to the pound's growth in the near future. Experts highlighted that the Central Bank expects the economy to recover as soon as possible, so the GDP growth forecast for 2021 has been raised. On the contrary, the forecast of UK GDP growth for 2022 was slightly underestimated.

Wells Fargo believes that the Bank of England is unlikely to raise its key rate before mid-2023, so the pound will remain relatively stable. The bank said that they view the current decision of the regulator as a modest growth potential for the pound. According to analysts, the indicated currency may strengthen against the dollar and the euro in the near future.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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