GBP in focus
The GBP has been a tricky currency to trade recently. Over the last few weeks the GBP has been moving higher with seemingly little reason. With the Bank of England meeting yesterday the main message seems to be continued uncertainty. In the COVID-19 induced crisis there is lack of certainty on forward guidance and even the debate around negative interest rates is uncertain. The bank of England does not think negative interest rates are effective, but is not ruling them out either. Uncertainty abounds.
Or does it?
I had been finding the GBP's resilience over the last few weeks confusing. After all with Brexit risks elevated and the chances of a 'no-deal' Brexit accelerating all the time why would the GBP been moving higher? Was it just end of month flows as espoused by many at the end of last month? If that was the case why was the GBP strong for pretty much most of July?
Has the market priced in Q2 as the worst of it?
A piece on Bloomberg suggested that investors had taken the view that Q2 was the low point for the UK's economy. If this was the case then the vote to keep the bond purchase target at £745 bln shows the BoE is happy with current bond levels. Also, with the BoE seeing inflation returning to 2% in two years and estimates for 1.75% next year the Bank of England will be able to keep rates as they are for now.
Is the GBP's strength a weak USD story?
The other factor of course is that GBP strength has largely been fuelled by dollar weakness. If we wee the DXY keep falling then GBPUSD upside looks set to continue save some very bad Brexit or economic news. With Brexit ahead and the furlough scheme coming to an end in October we could be in store for a busy autumn with the GBP.
