GBP/USD draws closer to 1.3500 following BoE Bailey's comments
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- The US Dollar regains some ground as trade war fears ease.
- The Dollar suffered on Monday amid renewed trade tensions and weak manufacturing data.
- Dovish comments by BoE Governor Bailey are adding pressure on the GBP.
The Pound is drifting lower on Tuesday, approaching the 1.3500 level. A somewhat brighter market mood, with fears about trade tensions easing, has helped an ailing US Dollar to pare some losses, while Bailey's dovish comments have increased pressure on the Pound.
BoE Governour Bailey, in his testimony on the May Policy Report, downplayed inflationary pressures stemming from higher tariffs and affirmed that the path for interest rates remains downward. The BoE chief has also warned about the uncertain global economic scenario, which will delay UK businesses’ investment decisions. ¡
The pair is coming down from the 1.3560 highs reached on Monday, with investors selling the US Dollar amid concerns about the economic impact of tariffs and the ballooning US federal debt.
Tariff uncertainty is hurting US manufacturing activity
US ISM Manufacturing PMI data confirmed those fears later on Monday. May’s reading showed an unexpected deterioration of the sector’s activity, while delivery times increased, raising fears of potential shortages of some products. These figures increased negative pressure on the USD.
In the US, the focus will be on April’s Factory orders, which will be observed with interest after the downbeat PMI data seen on Monday. Apart from that, the US JOLTS Job openings will open a string of labour market reports that ends on Friday with the all-important Nonfarm Payrolls report.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
