• Joel

GBP Bears Fade Initial Pop Higher Post BoE

GBP saw some interesting price action in wake of today's BoE meeting, spiking initially (the meeting was interpreted as less dovish than expected), before handing back these gains and some.

In terms of the meeting itself; the bank held rates at 0.1% as expected. The Asset Purchase Facility was increased by £100bln, at the lower end of expectations (some banks had called for an increase of some £150bln-£200bln). In terms of the outlook for the UK economy, the bank noted that the economy appeared to have recovered better than it had thought it would back at its meeting in May.

However, risks remain tilted to the downside, and there is a high risk that unemployment will remain at elevated levels over the coming years. Finally, the minutes revealed that there was no discussion on the topic of negative interest rates, meaning that a move in this direction maybe a little further off (if it does happen) than some had expected.

The initial pop higher in GBP is being attributed to the fact that the QE increase 1) was at the low end of consensus and thus not a dovish as it could have been and 2) means that the BoE will dramatically reduce the amount of bonds they are buying on a weekly basis – given that the bank’s QE programme is slated to continue until year end, weekly purchases are will need to fall to £4.5bln per week from the current rate of £13.5bln per week (so that the QE programme doesn’t run out before the end of the year, that is).

Adding to GBP’s initial upside was also the fact the bank was a little more optimistic on the outlook for the UK economy and there was no discussion on negative rates.

As noted though, the initial move higher in GBP quickly faded. Soon after (and unrelated to) the BoE meeting, risk appetite took a turn for the worse, with stocks and other risk FX taking a turn lower. This pressured GBP, given its risk sensitive properties.

Moreover, despite an improved outlook for the UK economy from the May meeting, the outlook is still morbid and not exactly something you would want to be buying GBP on. Perhaps most pressing for GBP, however, is continued concerns at the lack of progress being made in negotiations on the future relationship between the UK and EU, which continues to put any GBP rally at risk of being sold.

With things not looking good for GBP in terms of UK fundamentals (Brexit, economy), GBP’s only saving grace might be if USD resumes its downwards decline. Even then, GBP remains likely to underperform its other peers. 



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