We could start tightening the tap on QE – Andy Haldane, Chief Economist at the Bank of England, has single-handedly knocked sterling from its sleep and has sent it higher. He has also said that the UK economy is going “gangbusters” and that he is already seeing price pressures.
Cutting down on bond-buying means printing fewer pounds and thus a boost for the currency. GBP/USD is up to some 40 pips from the lows. However, there are several mostly UK-related reasons to doubt the uptrend will continue.
First, Haldane made these bold comments on his way out – he is retiring shortly. Even while he is on the BOE’s Monetary Policy Committee, eight other members do not necessarily share his views.
Secondly, Brexit is back and here to haunt the pound. The EU’s Maroš Šefčovič is holding talks in London about the Northern Irish protocol, a pinpoint in relations between Britain and the bloc. Brussels says the UK is dragging its feet while London says the EU is showing inflexibility. While the economic impact of NI-GB trade is limited, worsening relations could cause jitters on other issues such as the lucrative financial services sector.
Third, there is a growing sense that the UK’s “Freedom Day” – the last stage of the reopening due on June 21 – will be delayed. Rising COVID-19 cases have prompted health officials and also the government to reconsider the loosening.
On the other side of the pond, tensions are mounting ahead of Thursday’s release of inflation figures. China provided a heads up, reporting a surge of 9% YoY in producer prices last month. If consumers begin to feel the pinch in America, the Federal Reserve could follow Haldane’s advice and taper bond buying sooner rather than later – boosting the dollar.
GBP/USD Short (Sell)
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