BOE Preview: Does Bailey have a big bazooka? Only open-ended QE can stun sterling


  • The Bank of England is set to leave its policy unchanged after two emergency moves.
  • Following the Fed's open-ended QE may stun markets.
  • GBP/USD may be more responsive to new loan programs.

Cutting rates to the lowest in 300 years on the fourth day on the job – that is Andrew Bailey's record. The new governor of the Bank of England assumed office on March 16, after having taken part in his predecessor\s decision to slash rates to 0.25% in the previous week.

After the March 19 decision, the bank's lending rate stands at 0.10% and its Quantitative Easing program at £645 billion – up £200 billion from the previous levels. The BOE also announced a lending scheme worth around £100 billion, in its first coronavirus emergency decision and collaborated with the Federal Reserve's plan to enact swap lines to ease pressure on the dollar. 

That has been the frantic action of the BOE so far in March. The long month – which saw the British government move from its "herd immunity" policy to lock down the country – is not over for the bank. The Monetary Policy Committee (MPC) now convenes for the third time in March, this time for a scheduled meeting 

What else can Bailey and his colleagues offer? 

The economic calendar is showing that economists expect the "Old Lady" to leave its policy unchanged. That makes sense after the immense activity earlier this month. In that case, GBP/USD will likely return to rocking in response to the latest coronavirus headlines. This scenario has a high probability.

However, contrary to the Federal Reserve, the BOE did not cancel its scheduled meeting after making an unscheduled announcement. That implies more action may come. 

More QE 

Bailey may further expand the QE program to adjust to growing funding needs by the government. Prime Minister Boris Johnson's three-week shutdown will take its toll on public coffers and will Rishi Sunak's plan to pay 80% of salaries to those who are unable to work. 

An increase to a total of £700 or £800 billion would likely provide a boost to the pound. In standard times, printing pounds – or any other currency – would devalue it. However, in these extraordinary days, more money out of thin air means more fiscal firepower – at least until some point. 

If the BOE goes overboard with a total sum of £1 trillion, it would be even more impressive and could already weigh on the pound. The ultimate sterling stunner would be an open-ended program – following the footsteps of the Fed. Going unlimited could initially send sterling lower, but providing the government more support could eventually boost the currency, albeit not in the immediate term.

These QE scenarios have lower chances as the BOE has already made potent announcements recently. 

More lending

Bailey may prefer using saving this "nuclear option" in the shed and perhaps expand the bank's lending program. By offering cheap funding, the BOE could provide a "bridge loan" to businesses, keeping the economy afloat during the lockdown. 

That would amount to a "shot in the arm" for struggling companies, without printing money en-masse. In this scenario, GBP/USD would have room to run higher. 

This scenario has a medium probability and would strike a balance between taking a break after frantic activity and going "all-in." 

Conclusion

The BOE's third rate decision in as many weeks may result in no new policy measures after it already took substantial steps to support the economy. Governor Bailey and his colleagues may opt for offering more loans, thus helping the economy and boosting sterling. The third option is to add more QE, supporting sterling if done with care and weighing on it – at least in the short-term – if done without limits. The latter scenario has a lower probability. 

See Have stocks bottomed out? Not yet, wait for these three coronavirus-related developments

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

Latest Forex Analysis


Latest Forex Analysis

Editors’ Picks

EUR/USD drops towards 1.1300 on dovish ECB headlines

EUR/USD is extending the drop towards 1.1300 after the ECB is debating over a potential increase in the APP at its meeting next week. The US dollar rebounds amid a cautious mood. Omicron, US-China woes keep investors on the edge.

EUR/USD News

GBP/USD battles 1.3200 amid Omicron jitters, USD rebound

GBP/USD is trading flat around 1.3200, struggling to capitalize on the overnight goodish rebound from a one-year low. Fresh COVID-19 jitters pushed back BoE rate hike expectations and undermined the pound. Resurgent USD demand further stalled aggressive bullish bets.

GBP/USD News

Gold eases towards $1,780 on resurgent USD demand

Gold remains on the back foot below $1,790 amid broad US dollar reboud. Market sentiment dwindles as virus-linked news battles geopolitical fears, Fed rate hike concerns. Friday’s US CPI becomes crucial as inflation expectations improve.

Gold News

Analysts believe Ripple could beat SEC lawsuit on one condition

Experts are weighing in on the possible closure of the payments giant's lawsuit with the SEC. Analysts predict that the payment giant's win in the SEC vs. Ripple case could push XRP to a new high.

Read more

Cyber Monday 2021 Discounts!

Glued to your trading screen on Cyber Monday? Upgrade your skills by signing up for FXStreet’s Premium service, offered at a discount of up to 50%. Fellow traders have already taken advantage of Black Friday profits. What about you? 

Subscribe now!

Majors

Cryptocurrencies

Signatures