Will the pound strengthen in the future? Don’t bet against the Bank of England!

Pound to Dollar Rate Pushed Higher by Falling Covid Cases and Weak Dollar

The pound has been trading lower in the last 24 hours, as markets become fearful that the Bank of England will withdraw it’s market interventions. The Bank of England has been ripping up the rule book once again with less than standard procedures, with the emergency bond-buying program.

Expectations over just what the Bank of England will do next have seen the pound rising and falling, as the market tries to second guess what happens next.

Let us rewind two weeks, to the crash on the 26th September, following the mini-budget from the new Chancellor Kwasi Kwarteng. We soon saw the pound falling as investors confidence in the outlook for the British economy collapsed.

There was notably a very quick recovery that week, with the Bank of England’s pledge to buy ‘gilts’ or UK Government debt, helping to shore up confidence. The pound rose as investors became confident the BoE would step in, and there was also the prospect that the BoE would be needing to raise interest rates much higher, thereby supporting further the pound.

The twist this week, is that the BoE are now threatening to withdraw this support, and this has had the knock-on effect of seeing the pound lose value, with GBPUSD back towards the 1.10 level, and GBPEUR in the 1.12s.

The key question is do we believe the Bank of England will no longer intervene again in the bond markets? In underpinning the pound, and confidence at home and abroad, the BoE plays a fundamental role in monetary policy, and in painting themselves into a corner, do run the risk of potentially have to back track in the future, thereby losing credibility in the process.

FX markets were buoyed by the expectation the BoE would stand firm to support the pound and volatility, if they are now using that steadfastness to sit out of any future events that require their input, the confidence their prior approach helped to instil, could easily come crashing down.

If you need to make an FX transaction or international payment, understanding the latest trends and forecasts can be very useful in the planning and management of your transfer. As specialist FX brokers, we can help to provide insight, strategy and information regarding your options, to help you make an informed decision.

For more information or to ask any questions please email me Jonathan on [email protected]

Thank you