- The BOE expanded QE by more than expected, allowing for a quicker recovery.
- Its open commitment to additional bond-buying is also positive.
- Refraining from setting negative rates leaves this option further in the distance.
Printing money used to devalue the underlying currency – until the pandemic came around. Creating money out of thin air has not resulted in runaway inflation but in more growth, at least in stock valuations.
Here is how the Bank of England has benefited the pound:
1) More QE than expected: The BOE has announced an additional £150 billion in bond buying – exceeding £100 billion projected. The total is now £895 billion, more than double the pre-pandemic level of £435 billion. The gradual increase lowers the government’s borrowing costs and comes right on time – on the same day that England enters its second lockdown.
2) Commitment to do more: BOE Governor Andrew Bailey and his colleagues stated that the bank is ready to do more. Such a move is also significant as the UK could face a third shuttering in a long winter. Moreover, uncertainty about global growth remains significant. The promise compounds the better-than-expected QE.
3) No negative rates: Bank officials have publicly contemplated setting sub-zero borrowing costs and also announced they are examining its implementation. However, the November decision has been their chance to announce it. In addition to the decision and the accompanying meeting minutes, the BOE has released its quarterly Monetary Policy Report which includes new economic assessments.
While the bank sees risks to the downside, these are probably insufficient for such a drastic step. Investors may now think – if it has not happened now, it is probably off the radar for a long time. Bailey has said that work on negative rates is “ongoing” – yet as time passes by, the chances look slimmer.
What is next for GBP/USD?
Sterling will likely focus on Brexit talks, which have hit a snag after several days of progress. Sterling stumbled in response to this development, and now has room to rise if both sides return to expressing optimism.
The lockdown is already priced in, and the next moves depend on the virus. Infections seem to be stabilizing in Britain, while mortalities are on the rise. Further news from the health front is awaited.
For the dollar on the other side of the GBP/USD equation, the focus remains the US elections. Democratic candidate Joe Biden is leading President Donald Trump in the vote count in critical states, yet nothing is certain. Nevertheless, optimism is weighing on the safe-haven greenback.
Overall, sterling has reasons to rise.Get the 5 most predictable currency pairs