Bank of England: Recession Time? – Forex news preview
Posted on May 3, 2021 3:21 PM GMTMarios Hadjikiriakos, XM Investment Research Department
The Bank of England will release its latest interest rate decision at 11:00 GMT on Thursday, along with updated economic forecasts that Governor Bailey will present at his press conference. The UK economy is doing much better and there are speculations that the Bank may signal a slowdown in asset purchases. This could push the pound higher, but whether any gains continue will also depend on elections in Scotland on the same day.
Receiving a reward from vaccinations
The United Kingdom is finally ready to leave the nightmare of the pandemic behind. The economy has now reopened thanks to a lightning-fast vaccination program, and strong government relief measures ensure the crisis leaves no permanent scars.
Indeed, the British economy appears to be picking up steam. Retail sales surpassed pre-pandemic levels in March, signaling that consumers are hungry to spend again, while PMI business surveys hover near multi-year highs, indicating a period of strong growth ahead.
In addition, the Bank of England’s worst fears of unemployment have never materialized. The government extended the Job Preservation Program until September, reducing the risk of an imminent surge in unemployment.
Cone time? Probably no
In terms of the upcoming meeting, there are many rumors that the economic forecasts will be updated to reflect the smooth resumption of work and the successful introduction of the vaccine. In turn, this could lead the Bank to signal a slowdown in its asset purchase program, as the economy no longer needs to overload liquidity.
Will the Bank of England follow the Fed, saying it is too early to consider leaving QE, or will it follow the Bank of Canada and signal an approaching cut? This is a serious call, with strong arguments on both sides.
From a risk / reward perspective, it makes more sense to wait.… The economy could be doing better, but there are still a few risks the Bank of England must tackle, such as the potential rise in unemployment following the end of government support in September and the risks of vaccine-resistant options. Indeed, a hasty decision to phase out could even backfire as it spikes in UK bond yields and raises the cost of borrowing prematurely, making recovery more difficult.
Pay attention to political storm clouds
If the Bank of England does decide to wait until August before announcing any major policy changes, the pound sterling is likely to fall on the news. Looking at the pound / dollar from a technical point of view, initial support for the decline can be found near the 1.3800 area, where a break would shift attention to recent lows around 1.3670.
On the other hand, if the Bank of England pulls the trigger and signals a slowdown in QE buying, it could catapult Cable into the 1.4010 area. In case of violation, the next target could be the February peak of 1.4235.
Even if the Bank of England does narrow and the pound starts to rally, some political risks could quickly dampen enthusiasm. Voters in Scotland will elect their new parliament on Thursday, and opinion polls show a clear majority on independence. If so, the political battle for the second Scottish referendum is likely to begin.
This will be a major headache for Prime Minister Johnson, as it will potentially force markets to recalculate the political risk premium back to the pound. Local council elections are taking place across England on the same day, and any sign that Johnson’s Conservatives are losing ground could be another problem for the pound sterling.
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