Pound Sterling Forecast Scenarios on Bank of England Decision: TD Securities

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There is a chance the Bank of England will announce a boost to its quantitative easing programme at its Thursday 06 policy event, according to economists at TD Securities.

Such a move could amount to a sell signal on the British Pound for investors given growing expectations amongst market commentators and participants that the Bank of England (BoE) will instead say it intends to start shrinking its quantitative easing programme.

The BoE has a target of acquiring £875BN worth of government gilts, which is due to be met by year-end.

However, at a current weekly run-rate of around £4.4BN a week the target will be achieved before year-end, leading to a sudden loss of support to the economy from the BoE at this time.

Therefore, policy makers at Threadneedle Street face a number of choices on Thursday: taper the weekly purchases now, taper in June (which would mean a more severe reduction in the second half of the year) or, increase the size of the envelope.

The first two choices in the above are considered by foreign exchange analysts to be supportive of Pound Sterling valuations, the latter could however prompt some weakness.

"A stronger intent to taper asset purchases would put sterling into a new category of G10 currencies. Together with the CAD and NOK, a clear point to the exits would send a strong signal of a deeper divergence within the G10 complex. This, we think, would see GBP rekindle its upside potential against the USD and other major trading partners as the FX market has rewarded currencies issued by hawkish central banks," says Ned Rumpeltin, European Head of FX Strategy at TD Securities.

The base-case assumption at TD Securities (50% chance) is the BoE opts to keep its quantitative easing programme unchanged, posing the need for a decision to be made at the June Monetary Policy Report.

But, a boost to the quantitative easing programme being announced this week is assigned a 20% chance by strategists.

"There is also a strong chance that the MPC comes to a decision on the future of QE at the May meeting, in which case we look for a £90bn increase in the APP, so it can continue the current £60bn/quarter purchase pace through to the end of the year," says Jacqui Douglas, Chief European Macro Strategist at TD Securities.

Rumpeltin says such an outcome now appears to be relatively bearish for the Pound.

Under such a scenario, the Pound-to-Dollar exchange rate (GBP/USD) could move back down to 1.3775 from current levels at 1.39.

The Euro-to-Pound exchange rate (EUR/GBP) could rise to 0.8715, which gives a Pound-to-Euro rate (GBP/EUR) of ~1.1475.

Under the base-case scenario whereby quantitative easing is left unchanged, GBP/USD could remain around 1.39, EUR/GBP at 0.8630 and GBP/EUR at ~1.1587.

"The G10FX beta to central banks seems fairly low now, suggesting a muted reaction to our base case as investors roll expectations forward to June. Otherwise, we see a greater sensitivity on the dovish side as some participants already anticipate a taper this month," says Rumpeltin.

What would happen if the BoE did oblige the 'hawks' and chose to taper its programme?

TD Securities assign such an outcome a 20% chance and forecast the GBP/USD rate to test 1.3975 and EUR/GBP 0.8590, giving a GBP/EUR cross rate at 1.1640.

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