The European Central Bank (ECB) and the Federal Reserve of the United States (Fed) were the two major central banks releasing their statements in January. Come February, and it is the Bank of England (BOE)’s turn just one day ahead of the February NFP report (next Friday).
The Monetary Policy Committee (MPC) decision is of particular importance for British Pound (GBP) traders for at least a couple of reasons. First, it is the first meeting after the Brexit deal. Second, the pound has been one of the strongest currencies on the FX dashboard – will it continue to rally?
Things that the MPC Will Consider on Their Decision
There have been numerous changes since the last MPC meeting, and all these will weigh on the Bank of England’s decision. To start with, the economic growth is a net positive for the GBP.
While the new lockdown implies a worse near-term outlook, the vaccination campaign progress balances things and makes for a more certain recovery further down the road. The MPC cannot ignore it.
Moving forward, financial conditions remained stable, despite the health crisis. As such, equity prices and long-term interest rates rose since last December. Again, vaccine hopes are responsible for financial conditions stability too.
In the fiscal space, despite the new lockdown coming with more fiscal easing (GBP 4.6 billion of new grants to support businesses), this is peanuts in the grand scheme of things. Compared to the GDP, it represents barely 0.2%, an insignificant amount.
Everything above comes from the economic space. However, a central bank always considers the potential risks coming from all sources. One, for example, is the recent AstraZeneca scandal with the European Union. In the U.K., many already associated it with Brexit – a way of the European Union to punish the U.K.
Another risk is the possibility that COVID-19 masks the true effect of Brexit. As such, at the end of the pandemic, the U.K. risks finding itself in an ongoing crisis, this time on the economic and not on the healthcare front.
All in all, the GBP outperformed other major currencies on the back of many investors seeing opportunities in the United Kingdom. Also, traders keep a close eye on the vaccination race. Currently, 95% of the vaccination takes place in ten countries only, the United Kingdom being one of them. Hence, bidding for its currency makes sense from a macro-perspective as well.