BOE: Three Reasons Why Super Thursday Could Become A Sterling Suffer-Fest

A shot in the arm from vaccines and a second one from the Bank of England? That is what sterling bulls may have in mind ahead of “Super Thursday” – when the BOE publishes its quarterly report in addition to announcing its rate decision.

Since the bank last released its Monetary Policy Report in February, the outlook has significantly improved. Most importantly, the UK’s vaccination scheme has been at full speed, surpassing half of the population. It has already pushed COVID-19 cases, hospitalizations and deaths considerably lower – and also allowed the government to ease its restrictions.

Source: The Guardian

Moreover, Gross Domestic Product figures for January and February beat estimates, showing that the economy withstood the harshest months of the full lockdown. In March, the US Congress approved a $1.9 trillion covid relief package – above the BOE’s estimates of $1 trillion – that boosted the economy. US President Joe Biden aims for $4 trillion more in spending.

All that is pointing to some tightening from “The Old Lady” as the BOE is also known. The bank would probably signal an unwinding of its bond-buying scheme before considering raising rates. The Asset Purchase Facility (APF) ballooned to a total of £895 billion after the crisis, more than double the £435 billion it had been at prior to March 2020.

Any signal that the London-based institution is on course to embark on the long and winding road to squeeze its balance sheet could boost the pound. Fewer pounds printed and more confidence conveyed is good news for the current and for the British economy. Will any member of the BOE vote in May to begin the process? That would serve as a signal that tapering is coming in June.

On the other hand, there are three reasons to expect sterling to fall.

1) Inflation is weak

The Bank of Canada was the first out of the gate to announce it will buy fewer bonds – a fast vaccination campaign and strong demand from the US prompted Ottawa to act. However, the Federal Reserve continues characterizing rising inflation as transitory and only due to base effects and bottlenecks. The Fed will not taper despite rising prices.

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