GBP Surges On BoE's Upwardly Revised Growth Forecasts

BoE kept interest rates on hold but raised GDP forecast for 2020 to -9.5% from -14%

FOREX 1

As expected, the BoE kept monetary policy on hold with interest rates at the historically low levels of 0.1%. This meant that the quarterly inflation report and the tone of the central bank would drive movement in GBP.

Quarterly inflation report
The central bank presented an improved outlook in the quarterly inflation report for this year. GDP for 2020 was upwardly revised to -9.5% (-14% previously), with a smaller rebound in 2021 of +9% vs +15%. BoE considered that the recovery in the UK has been earlier and more rapid than initially expected. However, the bank also highlighted that risks to activity are skewed to the downside as the government unwinds job support.

Inflation is expected to be more subdued this year +0.25% vs 0.6% previously forecast and could turn negative temporarily, although the rebound next year is expected to be stronger. The central bank was clear that there will be no tightening of policy until a sustained move towards 2% inflation is seen. According to the BoE’s forecasts that won’t be within the next three years.

Negative rates
Much to the Pound’s delight not only were there no dissenters towards negative rates but the central bank also said that negative rates at this time could be a less effective tool to boost the economy

Conclusion
The BoE was considerably more upbeat about the recovery than had been expected. Upwardly revised growth forecasts, a more rapid recovery than initially feared and no tilting towards negative rates at this time has sent GBP surging towards $1.32. 

USD struggles
The same concerns that dogged the USD in July, resulting in its worst monthly performance in a decade, have unsurprisingly dragged into August. The greenback trades lower amid concerns that rising coronavirus cases will result in the US economic recovery lagging behind other countries. Whilst data has broadly been supportive, the picture surrounding the labour market is darkening rapidly. 

• The ADP payroll report showed that growth slowed sharply in July with 162k vs expectations of 1 million. 
• The ISM non-manufacturing PMI was upbeat with new orders hitting a record high. However, the employment sub component weakened considerably. 
• Initial jobless claims today are also expected to add to mounting evidence that the recovery in the US labour market has stalled. 

It will take a very impressive number from tomorrow’s non farm payroll to turn the USD around. Given the lead indicators this week, a strong NFP is looking highly unlikely.


More from GBP

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.