BOE Analysis: Bailey hits sterling with “I'll believe it when I see it” Fed-style move, will it last?
- 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.
Fed Analysis: Dovish dots down dollar, why this may be a buy opportunity
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Author
Yohay Elam
FXStreet
Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.
