GBP/USD back below 1.3900 as markets position ahead of this week’s BoE meeting
- GBP/USD was unable to break above its 21DMA and has slipped back under 1.3900.
- Markets seem to be positioning ahead of this week’s key BoE rate decision.
- BoE Governor Bailey was on the wires this morning and came across upbeat, setting the tone for this week’s meeting.
Over the last few hours, GBP/USD has fallen back to fresh session lows, the pair dropping into the 1.3850s at one point though having now pared losses modestly back to around 1.3880. That marks quite a reversal from prior session highs, set during the Asia Pacific and early European session, of close to 1.3950. GBP is now one of the worst-performing currencies in the G10 on the day, with GBP/USD down about 0.2% or 30 pips on the day.
Driving the day
No specific fundamental drivers stick out in terms of explaining recent movements in sterling. Monday’s price action appears to be a combination of technical selling after GBP/USD failed to break above its 21-day moving average at 1.3950, as well as position adjustment ahead of key events later in the week; namely the BoE rate decision on Thursday.
Bank of England Governor Andrew Bailey was on the wires this morning, surprising market participants given the Governor would not normally speak so close to a rate decision. Broadly speaking, Bailey was upbeat, teeing up a likely somewhat hawkish tone to this week’s rate decision; the Governor said that he has become more positive about the recovery and that the economic effects of virus restrictions appear to be reducing. Bailey said he expects the economy to recovery back to its pre-Covid-19 size by the end of the year and that the risk picture now is more balanced.
Moreover, Bailey noted that the build-up in savings presents an upside risk and that it is very helpful that the furlough scheme was extended beyond the projected end to Covid-19 restrictions. As such, the next Monetary Policy Report will show a lower forecast for unemployment (and will likely upgrade its GDP forecast). Separately, speaking on the recent rise in UK government bond yields, Bailey said the move is consistent with changes in the economic outlook and said that the Bank does not need to undertake QE in order to fund the government’s needs. All in all, quite a hawkish relative to recent commentary from other BoE members, though this has failed to give GBP much support on Monday in the end.
Other fundamental developments of note include reports from the UK press over the weekend that all UK adults will be offered their first Covid-19 jab by 10 June. This is well ahead of the government’s current targets for all adults to be offered a jab prior to the end of July. This undoubtedly bodes well the UK’s reopening agenda this summer.
News regarding EU/UK relations has been far less positive; the UK press was reporting over the weekend that the EU and UK are at “loggerheads” over post-Brexit fishing rights (nothing new there) and the EU has now officially launched legal action over alterations the UK government made to its trading arrangements with Northern Ireland. Bickering between the two sides is likely not to garner too much financial market attention unless the threat of tariffs/some kind of trade war is brought onto the table, in which case GBP is likely to take a hit given the smaller size of its economy versus the Eurozone.