FX.co ★ "Positive" pound: the rejection of negative rates opened the way to growth

One of the main obstacles to the growth of the British currency, namely the possibility of introducing negative rates by the Bank of England has gone off the agenda. As of this moment, the regulator has abandoned this measure that opened the way for the pound to go up.

Last night, sterling rose significantly after the Bank of England maintained its current monetary policy. According to the regulator, the introduction of negative interest rates is excluded in the near future. However, the Central Bank of England did not completely abandon this idea, leaving for itself a kind of loophole in case of unforeseen circumstances. The agency allows the possibility of introducing negative rates in a situation of extreme necessity.

The regulator's decision provided strong support for the pound. "Briton" won back the previous losses. Earlier, the GBP / USD pair was near 1.3570, and yesterday it rose sharply from 1.3695 to 1.3697. This morning, the GBP / USD pair was cruising near 1.3679 to 1.3681, rushing to the next peaks, in particular, to the mark of 1.3700.

Many experts feared that the decision of the Central Bank of England will push the pound down, as it increases the possibility of falling rates in the red zone. However, the regulator's optimism about economic growth in the UK helped normalize the situation. Analysts consider the revision of the country's GDP data for the current year to be a "dovish" sign. According to the updated forecast, GDP was reduced from +7.25% to +5%. Experts believe that the reason for this is the introduction of strict restrictive measures against the background of the COVID-19 pandemic. The agency believes that the growth rate of inflation may be high, and by the beginning of 2022, the consumer price index will reach 2%. At the current meeting, representatives of the Bank of England also voted to keep the key rate at 0.1% and to buy up assets worth 895 billion pounds.

Sterling's initial reaction to the Bank of England's decision was cautious: the GBP slowed slightly, and then tried to rise. After a while, experts recorded a high demand for the Briton. Analysts believe that the market is ready to buy the pound under the current conditions. The regulator believes that the transition to negative interest rates could provoke operational risks for most commercial banks. The agency believes that financial institutions should be prepared for negative rates if the economic weathervane turns in the negative direction.

Experts consider the current decision of the Bank of England partly "hawkish", since the introduction of negative rates did not happen, but the regulator did not abandon this idea in the future. According to Willem Sels, chief investment officer of HSBC Private Banking and Wealth Management, the Central Bank of England has left the door open for a further transition to negative interest rates, and in the near future this will lead to a fall in sterling. The analyst believes that the regulator has done a disservice to the national currency.

They do not exclude that the strengthening of the GBP could be short-lived amid strong appreciation of the USD caused by the rising US yields. The catalyst for the rise of the "American" was the adoption of a large-scale stimulus package and the inspiring prospects for the US economic recovery. As a result, the yield on 30-year US bonds reached its peak in March 2020. According to James Bullard, head of the Federal Reserve Bank of St. Louis, in April 2021, the US economy is expected to grow and the dollar will continue to strengthen. According to analysts of Trading Economics, investors are actively buying the US currency against the background of these expectations. An additional positive factor was the rise of the labor market in the United States, which is a litmus test of overall economic growth in the country.

In view of this, the British currency feels quite confident despite the strengthening of the greenback, according to UBS Global Wealth Management. Experts believe that in 2021, the pound will strengthen, as the Bank of England intends to keep interest rates at current levels as the economy recovers and inflation increases. According to Dean Turner, economist at UBS Global, the outlook for the British currency is quite positive. It is possible that in the next 12 months, the GBP will rise to 1.4500, experts sum up.