The British Pound, which has historically been one of the highest traded currencies, currently holds fourth place after the US Dollar, Euro and Japanese Yen. As with all currencies the supply and demand are largely influenced by the Central Regulator which for the UK is the Bank of England (“BoE”). The Bank of England uses tools such as monetary policy and regulation in order to modulate the currency, the employment sector and inflation. This Thursday holds one of the main events of the month for the British Pound in terms of price influences. The Bank of England will provide the following by Thursday Midday:
- Asset Purchase Facility
- Monetary Policy Committee Asset Purchase Facility and Bank rate Votes
- Monetary Policy Summary
- The Governor’s Conference
The UK’s Monetary Policy Committee (“MPC”)
The MPC is a committee within the Bank of England which meets at least eight times a year for approximately three to four days in order to discuss the country’s monetary policy as well as any “Forward Guidance” which they wish to publish. Both are known to have the ability to drive the price of the currency. The monetary policy covers mainly interest rates and quantitative easing while “forward guidance” is a report by which the Committee will advise any predictions they have for the economy and future policies.
The committee is made up of nine members which include both internal and external economists, governors, and ministers. The committee will vote on whether to amend interest rates and the current quantitative easing program (also known as Asset Purchase Facility). The nine votes will be released this Thursday.
The previous vote saw 8 members vote against altering the policy, and 1 member voted to slightly decrease the asset purchase facility. Even though there were no alterations, the fact that for the first time in months a member voted for the APF to be decreased had a large effect on the currency. Again, the market participants will be scrutinizing the votes and any changes compared to the previous month.
Will more members vote for a decreased Asset Purchase Facility or will all of them side with no alterations? Why do interest rates and QE hold such high influences over the Pound’s exchange rates?
Currency is priced largely based on Supply and Demand. Therefore the market particularly focuses on how much capital is being pumped into the economy, for example through Quantitative Easing programs such as Bond purchasing facilities and mortgage backed security purchases. This is something which is done by all Central banks at times where the economy requires support and stimulation
And the latter looks at what can drive up the demand? Higher interest rates are known to strongly increase demand as investors are more likely to get a competitive yield on their investment. For example, if in the Eurozone, the ECB is offering an interest rate of 0.5% and the BoE is offering an interest rate of 1.5%, then it is likely the UK will attract more foreign capital. Though, traders should take note that increasing interest is only likely to increase the demand if investors are comfortable with the investment and other aspects of the economy. For example, Turkey and other regions have high interest rates but little capital investments due to distrust and a devaluing currency.
The BoE’s Tricky Decision
Many market participants had hoped for a more hawkish MPC. However, the outcome over the next few months is far from certain and the MPC certainly have a difficult task ahead of them. The central regulator does not intend to repeat well known past mistakes such as when the ECB increased interest rates in 2011 due to energy price increases. Currently, issues still remain in the UK within regards to skilled worker shortages, supply chain and high risk of economic stagnation.
In order for the MPC to alter the current policy they will likely wish to see stability in the employment sectors and general economic conditions. Employment figures after the furlough scheme ends this month as well as GDP will be key to their decision. The latest gross domestic product rose just 0.1%, and remains 2.1% below its pre-pandemic figures, said the Office for National Statistics. It also fell short of predictions made by UK economists. Again, the question rises as to whether alterations will have a domino effect on general economic activity or further strain the GDP.
As inflation remains high in the UK as with elsewhere, the BoE is faced with a tricky decision. Whether to alter the monetary policy in order to keep inflation under control or to keep the policy in stimulus mode in order to assist the country’s GDP. The stance taken can cause volatility on the currency’s exchange.
To conclude, the price movement of the British Pound has been generally bullish over the past 12 months. Even with taking the above points into consideration it is important to note that the GBP is known to be a strong currency with a government which prefers importing advantage. However, the price movements over the past two weeks have generally been more bearish. Our webinars, will also look at the price movement of assets and general market developments.
Is the Monetary Policy Committee influence on the GBP clearer?
