The two most important days of the week are here; tomorrow, we have the US NFP data, and today, we have the monetary policy decision by the Bank of England. No fireworks are really expected at this event, as it is widely believed that the BOE will leave the interest rate as it is. Traders are also not expecting any change in the asset purchase programme from the BOE, although there is a strong possibility that the bank may upgrade its economic growth projections for the country.
The reality is that the Bank of England is in a much stronger position now as compared to a few months ago, and the primary reason for this is the massive success of the coronavirus’s vaccine process. Nearly half of the population has already received its first dose of coronavirus’s vaccine, and new daily cases have fallen below 2,000. If we look at the same figure a couple of months ago, this number was well over 40,000 a day.
The UK has also eased off a number of coronavirus-related restrictions, and more restrictions will be eased off this month. In addition to this, international flights, especially to Europe, will also be opened this month, and businesses have started to bring back their employees into their offices. The public transport system shows that traffic flow has increased significantly, and the UK is also going to drop the social distancing rule very soon. Basically, all lockdown restrictions will be dropped by June 21st.
It is true that the Bank of England has been optimistic about economic growth, but the actual economic numbers have been stronger than their expectations. This is despite the fact that the UK faced two challenges at the same time: coronavirus and Brexit. As a result, we have seen some serious strength in the Sterling, and it seems like that there is still plenty of steam left in its rally.
Having said all of this, it is highly unlikely that the Bank of England will pull the trigger on the tapering process before the Federal Reserve. Although, the timing for them could be incredibly close, just like before.
Overall, Sterling is likely to see some more strength today on the back of this event as there is very little chance of the bank being overly dovish. It is true that the bank may acknowledge that the recovery is still fragile as the government support programmes such as the furlough scheme are still in place. It is also true that it is arduous to measure the actual strength of the labour market when it is artificially kept strong. Only once all those schemes are withdrawn fully, then one can then assess the true picture of the UK’s labour market.
Nonetheless, an upgrade in economic growth forecast should bid up the Sterling as currency traders are likely to show their renewed confidence in the currency. It is likely that the GBP/USD pair could top the 1.40 price level without any hesitation.