British Pound Talking Points
Fresh projections coming out of the Bank of England (BoE) instills an improved outlook for the British Pound as the central bank expects economic activity to return to pre-pandemic conditions later this year, and the update to the UK Gross Domestic Product (GDP) report may generate a limited reaction in GBP/USD as the Monetary Policy Committee (MPC) slows the pace of its weekly asset purchases to GBP 3.4B from theprevious rate of GBP 4.4B.
Fundamental Forecast for British Pound: Neutral
The British Pound consolidates following the BoE rate decision as the central bank votes 8 to 1 to keep the Asset Purchase Facility (APF) at GBP 895B, and it seems as though there will be a growing rift within the MPC as “UK GDP is expected to have fallen by around 1½% in 2021 Q1, less weak than was assumed in the February Report.”
It remains to be seen if the update to the UK GDP report will impact the British Pound as two consecutive quarters of negative growth signals a technical recession, but the fresh data prints may do little to influence the monetary policy outlook as the BoE emphasizes that “GDP is expected to recover strongly to pre-COVID levels over the remainder of this year.”
In turn, there may be a growing discussion with the BoE to gradually adjust the forward guidance for monetary policy even though “the expected completion point of the purchase programme remained unchanged,” and a greater number of MPC officials may adopt a less dovish tone over the coming months as Governor Andrew Bailey and Co. insist that “there were good reasons for believing this strength in domestic demand would be maintained.”
With that said, the UK GDP report may go unnoticed as the BoE anticipates the economy to return to pre-pandemic conditions later this year, and the ungraded outlook may keep the British Pound afloat as it fuels speculation for a favor a less accommodative policy.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong