The Pound Sterling exchange rates decreased in the middle of a negative tone into February 4’s Bank of England policy decision. On the other hand, foreign exchange markets were wrong-footed, and the Pound Sterling recovered fast as the bank looked through the near-term weakness to focus on the expectations for robust recovery this year.
The ruling out of the near-term move to adverse interest also affected the Pound Sterling higher. The Pound-to-Dollar exchange rate has strengthened to 1,3700 from 1,3565 lows on February 5, with the Pound-to-Euro exchange rate supporting fresh 8-month highs near 1.1440. The Pound-to-Swiss franc exchange rate has also posted new 11-month highs around 1.2370.
Near-Term Attention for GBP and USD
The Pound Sterling boosted as the Bank of England rejects the negative rates amid firm recovery hopes. The Bank of England made no policy changes with interest rates held at 0.1% and total assets bought at £895 billion with both decisions unanimous.
The bank now expects a GDP contraction of 4.2% for the first quarter compared with slight growth expected in the November 2021 report. Still, the bank also expects a significant recovery before 2021 ends.
There will also be preparations to allow negative interest rates as part of the Bank of England toolkit. Still, there will be no move to introduce them for at least six months, and there is little enthusiasm for their introduction, with the committee showing that there was no intention of any short-term move.
Bank Governor Bailey commented, “My message to the markets is you really should not try to read the future behavior of the MPC from these decisions and these actions we’re taking on the toolbox.”
Meanwhile, Oxford Economics economist Martin Beck said, “On negative rates, while the BoE judges these are a practical option, they are unlikely to be needed by the time preparations are complete.”
The bank’s expectations of a strong economic recovery and rejection of any near-term move to negative interest rates provided a dual boost to the Pound Sterling.
ING also noted the substantial re-pricing in interest rate markets and expected further Pound Sterling gains.
US Dollar (USD) Boosted by Employment Hopes
Despite the near-term reservations over consumer spending trends, the US dollar has maintained a firm tone on expectations that the overall economy is strengthening, especially compared to the Euro area.
The business confidence data has been thriving. According to Tohru Sasaki, the head of J.;P Morgan’s Japan market research in Tokyo, said: “The U.S. economy is exceptionally strong relative to other countries, causing dollar short-covering.”
The latest monthly US jobs report is due on February 12. A firm release would maintain US dollar demand; the data’s reaction will be an important indicator of underlying sentiment.
According to HSBC, “The key for the FX market is how the USD reacts should there be any further upside surprise in tomorrow’s data. If the US exceptionalism theme is really getting traction, then a strong number should see the USD rally.”