Sterling whipsaws after BoE decision

Policymakers voted unanimously to leave interest rates unchanged at the current record low of 0.1% while a majority (7-1) voted to maintain government bond purchases at £875 billion. The latter vote was a slight surprise with the only dissenter being Michael Saunders, who was looking at tapering bond purchases as soon as possible, calling for a reduction to £830 billion.

There were a couple of tasty takeaways from the meeting, ranging from higher inflation forecasts to mention of tapering plans among other key topics. Policymakers remained optimistic with the latest growth forecasts barely changing from the meeting in May. The bank kept its growth projections at 7.25% for 2021 with GDP forecast to have risen 5% in Q2, but to have slowed to roughly 3% in Q3, reaching pre-pandemic levels in the fourth quarter. Inflation is expected to hit 4% by the end of 2021, though the BoE sees it as “transitory”, echoing the view of the US Federal Reserve.

When it comes to rate hike hints, the bank has made some fairly significant changes to its statement.  The MPC acknowledged that “modest tightening of monetary policy over the forecast period is likely to be necessary” to tame inflationary pressures. In regard to tapering, the BoE also stated that it will begin unwinding purchases when interest rates hit 0.5%, which is much earlier than the previous level of 1.5%. The speed of the unwind does have the potential to be quicker than many expected. All in all, the central bank came across as positive with another small step towards tightening, although any action is still some way off.

This upbeat message has seen the pound appreciate against most G10 majors today, excluding the Australian Dollar, Norwegian Krone, and Canadian Dollar. GBPUSD whipsawed following the BoE decision with prices now trading marginally above 1.3900 as of writing. The major continues to trade in a choppy range on the daily charts with resistance around 1.3950. A solid daily close above this level could open the doors towards 1.4000 and 1.4070. Alternatively, a strong decline back below 1.3900 may open a path towards 1.3840 and 1.3786. For cable traders especially, focus now turns to the all-important monthly US employment report released tomorrow.