GBP Rebounds, Bank of England Slightly Pessimistic on Tightening

At its September meeting, the Bank of England voted 9-0 to keep the Bank rate at 0.1 percent. The members agreed 7-2 to keep the QE program at its current level of 895 billion pounds. External members Michael Saunders and Deputy Governor Dave Ramsden advocated for decreasing the asset purchase amount to 840 billion pounds. Because of the rise in energy prices, policymakers have warned that inflation could rise above 4% by the end of the year.

In terms of economic developments, the central bank raised its inflation outlook but lowered its growth forecast for this year. Because the rise in inflation has been more persistent than projected, the central bank has warned that it could reach +4% y/y by year’s end, owing primarily to the energy price shock. The substantial increase in spot and future wholesale gas prices since the August Report posed “an upside risk to the MPC’s inflation projection from April 2022, and implied that CPI inflation may remain over 4% into 2Q22, all else equal,” according to the minutes.

Since the last meeting, the UK economy has exhibited signs of easing. At the meeting, the Bank of England lowered its GDP growth predictions, citing supply chain issues as a reason for the slowdown. In 3Q21, GDP growth is expected to be +2.1 percent, down from the prior forecast of +2.9 percent and roughly +2.5 percent below the epidemic level.

While the central bank did not adjust any of its monetary policy tools, it did send a slightly more hawkish message. To begin, two members, rather than one, opted to reduce the extent of asset purchases. Second, officials admitted that “some developments during the intervening period appear to have bolstered that argument [of tightening], albeit large uncertainties remain,” according to the report. Following the news, GBPUSD rebounded to a three-day high of 1.3711, indicating that the market interprets it as a hawkish signal.

GBP Rebounds on Bank of England Hawkish Surprise

Sterling has recovered significantly after two members of the BoE MPC voted in favor of tapering. Recent events have further bolstered the case for mild tightening. Commodity currencies have also firmed as a result of the stock market’s minor recovery.

The Yen, Swiss Franc, and Dollar, on the other hand, weakened as risk sentiment improved. However, the Pound continues to be the worst-performing currency this week, while the Swiss Franc remains the strongest.

GBP/USD break of minor barrier at 1.3691 shows that the decline from 1.3912 is over, and a larger increase might be expected to retest this level. Similarly, the break of 150.80 minor resistance in GBP/JPY forecasts a bigger advance to 152.82 resistance. The key question will be if EUR/GBP can break through 0.8499 and test the 0.8448 level. In general, Sterling appears to be on the mend.