• The BOE is set to leave rates unchanged but its tone is set to rock the pound.
  • Recovery from coronavirus has been rapid and may hold back the bank from hinting new stimulus.
  • Higher uncertainty about Brexit, coronavirus, and the furlough scheme may result in a concerned message.

Glass half-full or half-empty? That is the dilemma for the Bank of England as it convenes for its September decision. Officials have been hinting that a change in policy is unlikely after slashing rates to 0.1% and raising the Quantitative Easing program to a total of £745 billion earlier this year. 

Nevertheless, the BOE is set to rock the pound via its updated views on the economy. The accompanying meeting minutes will probably reveal a contrast between the relatively upbeat recovery and growing uncertainty – our outright fear about the next few months.

Promising recovery

The UK economy suffered badly from coronavirus and the ensuing lockdowns. However, it has rebounded better than many had expected. Andy Haldane, Chief Economist at the BOE, said "so far, so V" at some point – referring to a V-shaped graph of economic performance.

While most economists probably do not share the view of such a sharp comeback, the bounce has been impressive. Examining four-top-tier figures released in mid-August, they all exceeded economic expectations. Unemployment remains low, Gross Domestic Product tanked in the second quarter but rebounded, and even inflation is off the lows.

These economic figures are enough for the BOE to hold its horses at this junction. However, it may hint new action down the road if conditions deteriorate, and there are three reasons for them to fall.

Source: FXStreet Economic Calendar

Trio of troubles 

1) Brexit uncertainty:

Instead of advancing toward a post-transition period trade deal, Prime Minister Boris Johnson is moving to violate the divorce bill signed last year. Parliament is debating a controversial bill that the government admits to breaking international law on customs arrangements. Brussels responded by laying down an ultimatum to slap sanctions if Britain fails to rescind the legislation by the end of the month.

While the BOE is unlikely to comment on politics, it may stress that Brexit uncertainty has risen and poses a downside risk to the economy, potentially sending sterling lower. 

2) Coronavirus cases rising:

The UK imposed new restrictions following an increase in COVID-19 infections – most notably prohibiting gatherings of more than six people. The worrying trend poses a risk to the economy ahead of winter, when the situation may further worsen.

The bank may conclude that most of the "low hanging fruit" of the recovery has already been picked, and the disease now risks a full return to normal. On the other hand, officials are also following positive developments regarding approving a vaccine. Their approach may be more nuanced on the topic.

3) The fate of the furlough scheme

Britain's impressively low unemployment rate of 3.9% is a result of the government's successful furlough scheme – paying people unable to work most of their salaries. The program expires in October and Chancellor Rishi Sunak said it is unsustainable, adding that many people will lose their jobs.

A cliff-edge fall of the scheme would deal a devastating blow to the economy and the BOE may hint that it is ready to buy more bonds to help fund a tapering down of the program. That would be pound-positive

Conclusion

The BOE is set to leave its policy unchanged in September but its views on recent developments – and the outlook moving forward are likely to rock the pound. The encouraging recovery so far is countered by uncertainty related to Brexit, the virus, and the furlough scheme. 

More Lagarde gives the euro some legs, but the rabbit hole is near – how central banks move currencies

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD stays below 0.9800 after US inflation data

EUR/USD stays below 0.9800 after US inflation data

EUR/USD continues to trade in negative territory below 0.9800 in the American session on Friday. The data from the US showed that the annual PCE inflation declined to 6.2% in August but the stronger-than-expected core reading didn't allow the pair to gain traction.

EUR/USD News

GBP/USD rebounds from daily lows, reclaims 1.1100

GBP/USD rebounds from daily lows, reclaims 1.1100

GBP/USD fell to a fresh daily low below 1.1030 but managed to reverse its direction and climbed above 1.1100 during the American trading hours on Friday. The pair remains on track to snap a two-week losing streak despite having suffered heavy losses earlier in the week.

GBP/USD News

Gold extends daily rally beyond $1,670

Gold extends daily rally beyond $1,670

Gold preserved its bullish momentum and rose above $1,670 after the mixed inflation data from the US on Friday. The benchmark 10-year yield is down more than 2% as markets look to wrap up the third quarter, fueling XAU/USD's daily rally. 

Gold News

Shiba Eternity download day the biggest bullish catalyst in SHIB history?

Shiba Eternity download day the biggest bullish catalyst in SHIB history?

Shytoshi Kusama, the project lead for Shiba Inu, has dropped a teaser about Shiba Eternity games for the SHIB community. Proponents expect the launch of the collectible card game to be a bullish catalyst for Shiba Inu price. 

Read more

SPDR S&P 500 ETF Trust (SPY) Forecast: We are teetering on the brink

SPDR S&P 500 ETF Trust (SPY) Forecast: We are teetering on the brink

Equity markets remain at the precipice of a technical collapse, which we examine in the weekly long-term chart below. The overall picture remains one of nervousness ahead of the upcoming Q3 earnings season.

Read more

Majors

Cryptocurrencies

Signatures