BOE Analysis: Newfound hawkishness is one step behind the Fed, GBP/USD remains disadvantaged

  • The BOE has left its policy unchanged with only one member supporting tightening.
  • Several moves by the bank echo the US Fed, implying the BOE will not move alone.
  • GBP/USD is disadvantaged when it comes to monetary policy.

Inflation is transitory – that has been the message from Federal Reserve officials for months, and it has now been echoed by the Bank of England. That is only one of the similarities between central banks on both sides of the pond. The BOE seems to wait for the Fed to act first also on hawkish dissent, hints of tapering. That is food for GBP/USD bears.

The "Old Lady" is no rush to act, with only one member voting for tapering down the BOE's bond-buying scheme. Some investors had expected that two members would support tightening already now, and that has an immediate downside impact on sterling. There could be more in store. 

The sole dissent is a hawkish shift in comparison to unanimous support for buying bonds. However, it serves as only as a minor baby step toward tightening, a signal of a cautious approach that is looking over the pond to the Fed. Moreover, the BOE said that only "some modest tightening" of monetary policy is likely and only consistent with higher inflation. 

Other dovish moves include leaving growth prospects unchanged for 2021, reflecting levels of uncertainty and no urge to rush. That contrasts the Fed's more upbeat projections and talk of announcing tapering already this year. Over in Washington, Fed Vice-Chair Richard Clarida and others seemed to ramp up the talk of tightening. The BOE maintains a safe distance. 

All this implies GBP/USD has room to fall, as monetary policy is now in the spotlight and central banks generally have the largest impact on currencies. However, Britain still retains a lead over the US when it comes to vaccinations. Moreover, it is already climbing down the hill of Delta variant covid infections, whereas American statistics are moving in the wrong direction.

All in all, the BOE's relative dovishness is set to keep the pound under pressure against the dollar, but not one that is devastating. 


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