Pound Sterling post-Bank of England Losses Temporary say Analysts

- GBP dips a buy says BNP Paribas
- BoE sounds an optimistic tone on UK economy
- But inflation forecasts disappoint markets
- Rate rises only likely in 2025: Goldman Sachs

Bank of England impact on the Pound

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Foreign exchange analysts have been reacting to the decline in the British Pound in the wake of the Bank of England's Thursday policy event with some saying any weakness in the currency could be seen as a chance to buy.

The Bank of England (BoE) said it would reduce the amount of assets it buys under its quantitative easing programme each week, while also hiking growth forecasts.

On the surface these two developments would be perceived as supportive of the Pound.

But, an abject refusal by the BoE to bring forward from 2023 the date it expects interest rates to rise undermined those bulls looking for a rally in the UK currency.

John Hardy, Head of FX Strategy at Saxo Bank says the market's "knee-jerk" decision to sell the Pound was "a bit unfair".

"The market was pricing a fairly hawkish Bank of England meeting... and largely got what it expected, although the knee-jerk selling of sterling in the wake of the BoE statement suggests that more was needed to justify the recent build-up of more hawkish expectations around the meeting," says Hardy.

Pound to Euro coming under pressure in the wake of the BoE

Above: GBP/EUR trade on the day of the BoE event

Thu Lan Nguyen, FX and EM Analyst at Commerzbank says the decision by the BoE to reduce the speed of the asset purchases means it is now able to extend the overall purchases over a longer period.

"That in itself is not really a positive signal for Sterling. After all it is clear that interest rates will only begin to be normalised once the QE programme has come to an end. The longer the programme continues for, the later interest rates are likely to be hiked," says Nguyen.

The Pound-to-Euro exchange rate (GBP/EUR) dipped to record a low of 1.1495 in the hours following the BoE event.

The Pound-to-Dollar exchange rate (GBP/USD) dipped to a low of 1.3859.

Foreign exchange strategists at BNP Paribas were however 'on the money' when they said ahead of the BoE event that a lot of positive news already in the price of the Pound regarding the BoE story and therefore risks to the Pound were skewed to the downside going in to this meeting.

"We would view any GBP weakness in response to the event as an opportunity to buy GBP, as we remain bullish over the medium term," says Parisha Saimbi, G10 FX Strategist at BNP Paribas in London.

Despite Sterling's decline, analysts at Wells Fargo say they view the Thursday announcement as a modest upside to their outlook for the British Pound.

"We also view the announcement as broadly consistent with our medium-term profile which already anticipates modest gains in the pound versus the U.S. dollar over time, and a stronger pound versus the euro," says Nick Bennenbroek, International Economist at Wells Fargo.

Daily chart Pound to. Dollar

Above: GBP/USD was left relatively unscathed on May 06 and treads a broad sideways pattern.

FX transfers: Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more. (Advertisement).

The BoE must stretch its existing £150BN purchase programme until the end of 2021 and therefore reduced its weekly assets to £3.4BN from the £4.44BN seen over recent weeks in order to do so.

We noted ahead of the event such a call was deemed by foreign exchange analysts to be supportive of upside in the Pound.

But, that the BoE does not see interest rates rising before 2023 - as per their suite of forecasts - looks to have disappointed buyers of Sterling.

Indeed, the BoE said in a statement the decision to reduce weekly purchases should "not be interpreted as a change in the stance of monetary policy."

This is a message designed to ensure markets keep their expectations for tighter monetary conditions in the future contained; what policy makers do not want is for markets to interpret the decision as a signal that interest rate rises are coming sooner than later.

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In addition, the BoE pushed back growing expectations for a future interest rate rise by sounding a sanguine tone on inflation.

The BoE said:

"Inflation is projected to rise to close to the target in the near term as some of those effects fade. In the central projection, CPI inflation rises temporarily above the 2% target towards the end of 2021, owing mainly to developments in energy prices. These transitory developments should have few direct implications for inflation over the medium term, however. In the central projection, conditioned on the market path for interest rates, inflation returns to around 2% in the medium term."

It is this pushing back on expectations for an interest rate rise before 2023 that appears to have opened the door to Sterling weakness.

Goldman Sachs economist Steffan Ball says on net, the MPC now assume a slightly lower medium-term inflation path than in February and the yearly rate of inflation ends up just below target in 2024, pointing to more room to run until tighter monetary policy is warranted.

Goldman Sachs continue to expect the BoE to shrink its balance sheet before hiking Bank Rate in 2025.

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