- The BOE has left its policy unchanged as expected and acknowledged the improvement.
- Sterling has suffered as the bank refuses to act before seeing evidence of inflation.
- The a la Fed response may have a limited impact.
"Clear evidence of progress" on inflation is needed before the Bank of England begins tightening – that is the message that markets have clung to and the result is a weaker pound. Less than 24 hours after the Federal Reserve announced its policy is "outcome-based" – acting after seeing prices rise rather than preempting them – the BOE seemed to have copied the message.
And similar to the Fed, the "Old Lady" balances the message with positive comments as well. Global growth is better than anticipated, consumption is set to be stronger in the spring due to the lifting of restrictions, and even on inflation, the outlook is positive. Consumer prices are set to "swiftly" return to around 2%.
Will the pound remain on the back foot? If the Fed has been the guide for the BOE, the reaction in the pound may follow the dollar. The greenback suffered due to a commitment to keep monetary policy loose. It then advanced when Treasury yields resumed their gains as markets took elevated growth forecasts to mean higher inflation and earlier rate hikes.
Is it time to watch UK Gilts? Returns on British debt have returned to pre-pandemic levels, but remain low. If the positive comments in the BOE's statement result in a sell-off of UK debt, sterling may follow.
All in all, Bailey's blow to the pound may turn into another GBP/USD buying opportunity.
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.